Start your engines! General Motors (NYSE:GM) will report its first-quarter 2018 earnings results on Thursday, April 26. What should we expect?
What Wall Street expects
Analysts polled by Thomson Reuters expect GM to report first-quarter earnings of $1.28 per share, on average, down from $1.75 in the first quarter of 2017. They expect GM's revenue to come in at $34.6 billion, down from $41.2 billion a year ago.
That's a huge drop in revenue! What happened?
Part of what happened is that GM sold its European subsidiary, Opel AG, in a transaction that closed early in the third quarter of 2017. On a "continuing operations" basis, excluding Opel's results, GM generated $37.3 billion in revenue in the first quarter of 2017.
Analysts are still expecting a year-over-year revenue decline, but it's a $2.7 billion decline, not a $6.6 billion drop.
Is this about falling sales?
Good question, but probably not. GM's sales didn't decline in the first quarter, at least not in its two largest markets. The General's U.S. sales rose 3.8% in the first quarter, on good results for its profitable crossovers and big SUVs. Its sales in China were up 7.9% from a year ago, paced by a 40% year-over-year increase in high-profit Cadillac sales.
Sounds good, right? Yes and no. When we dig deeper, we see some reasons to think that GM's margin (and revenue) might get squeezed this time around. For starters, GM's incentives in the U.S. are at a high level: 13.3% of its average transaction price (ATP) in the first quarter. And lower-margin fleet sales made up a somewhat higher percentage of GM's overall U.S. sales than they did a year ago: While overall sales were up 3.8%, GM's U.S. retail sales rose just 0.8%.
That said, GM points out that its U.S. ATP, which is net of incentives, was up $900 from the first quarter of 2017.
What about China? We don't have as much visibility into GM's pricing in China as we do here in the United States. But we note that aside from Cadillac, which represented just 5.6% of GM's overall sales in China in the first quarter, many of the strongest results were for inexpensive models: A discount compact car called the Chevrolet Cavalier, and several entries from the low-priced Baojun brand, were among GM's biggest sellers in the first quarter. A year ago, GM was moving more Buick crossovers: Sales are strong, but despite the big sales increase for Cadillac, the overall mix of products suggests a drop from the 9.3% margin GM realized in China in the first quarter of 2017.
What else could dent GM's results this time around?
GM said in February that it will take a one-time charge of about $850 million in the first quarter, related to its decision to close a factory in Korea. About $375 million of that will be a cash charge, related to employee separations; the remainder will be non-cash impairment charges (accounting changes, in other words).
GM's full-year guidance calls for a 2018 result roughly equal to its 2017 adjusted earnings per share of $6.62. CFO Chuck Stevens said in January that he expected increases in spending (for product launches and new technologies), commodity-related cost headwinds, and pressure on pricing in the U.S. and China all to be largely offset by strong sales of GM's new line of crossover SUVs.
But, he said, GM expects to lose about 70,000 units of full-size pickup production (and to spend a lot of money) as it gears up to launch all-new versions of its Chevrolet Silverado and GMC Sierra pickups late this year. GM's truck factories will be shut down during several periods this year as they're updated and reworked to produce the new trucks. It's possible that effort could have some impact on GM's first-quarter results.
So what should we expect?
Let's sum up: GM's year-over-year sales results were strong, though there's some hint that its pricing was under pressure during the quarter. Its spending is probably up from a year ago, as it works to bring new trucks to market late this year.
I think it's likely that GM will beat Wall Street's expectations for adjusted earnings per share, and it might beat on revenue as well. We'll find out on Thursday morning.