At first glance, the first-quarter results that General Motors (NYSE: GM) reported earlier this week may not have looked too impressive. Adjusted operating profit fell to $2.3 billion from $2.6 billion a year ago. Operating profit declined year over year in North America, China, and the GM Financial business -- General Motors' three main sources of profit. Adjusted earnings per share slipped to $1.41 from $1.43 a year earlier. Excluding one-time gains of $0.31 per share related to an increase in the value of GM's investments in other companies, adjusted EPS would have been $1.10, just below the analyst consensus of $1.11.
As a result, investors reacted negatively to the earnings report, sending GM shares down 2.6% on Tuesday. This was a sharp contrast to how investors reacted to Ford Motor's (NYSE: F) earnings report a week earlier. Ford stock surged 10.7% on the day after the company's Q1 earnings release.
However, the apparently wide gap in performance between GM and Ford last quarter all comes down to timing. General Motors' Q1 results were quite solid in light of the headwinds it faced last quarter, keeping it in position to deliver strong full-year earnings.
Downtime dings GM's results
In North America, GM's adjusted operating profit fell to $1.9 billion last quarter from $2.2 billion a year earlier. The biggest factor holding down the General's domestic profitability was downtime at its full-size SUV plant in Arlington, Texas, related to the introduction of upgraded models for the 2020 model year.
This downtime reduced full-size SUV wholesales by 23,000 units last quarter. GM also took a week of downtime at one of its pickup plants during Q1. Considering how profitable these models are, this downtime caused GM to miss out on hundreds of millions of dollars in profit -- potentially accounting for its entire operating profit decline.
Downtime at SUV and truck plants hurt GM's earnings last quarter. Image source: General Motors.
Some timing factors related to debt issuances also caused GM Financial's operating income to fall to $359 million from $443 million a year earlier. Nevertheless, GM Financial's earnings should still be roughly flat for 2019 as a whole.
GM has high hopes for the rest of 2019
General Motors expects the first quarter to be the weakest of the year in terms of profitability. The second quarter is also expected to be below average. There will be three weeks of downtime at GM's heavy-duty truck plant this quarter, which represents a significant earnings headwind, albeit not as severe as the Q1 downtime. Additionally, GM is temporarily slowing production in China in order to reduce dealer inventories in the face of slumping demand.
By contrast, GM will have less downtime in North America during the second half of 2019 than it did in the same period a year ago. Meanwhile, it will be able to reap the benefit of having fresh products in numerous high-volume, high-profit segments.
As a result, General Motors expects its operating profit and cash flow to be significantly higher in the back half of 2019 than in the first half of the year. That's the opposite of the 2019 earnings cadence that Ford CFO Bob Shanks laid out on the company's recent earnings call. Ford expects the first quarter to be the peak for the year, mainly due to the timing of its vehicle launches.
Truck sales are the key
The possibility of weak truck sales is perhaps the biggest threat to GM's 2019 outlook. General Motors reported a 12.5% decline in domestic full-size truck deliveries for Q1. That allowed Ford and Fiat Chrysler's Ram brand to make substantial market-share gains.
GM's management says that investors shouldn't be worried. The company is still early in the launch cycle for its next-generation truck platform. GM decided to focus on ramping up output of the priciest and most profitable models first. As a result, sales of crew-cab models rose 20% last quarter. And deliveries of the higher-priced GMC Sierra declined just 2.2%, compared to a 15.7% drop for the Chevy Silverado, providing further support for management's argument.
Inventory of the cheaper double cab and regular cab models will reach normal levels later this quarter, enabling better sales trends as the year progresses. So there's a good chance that GM will soon recapture the full-size truck market share that it lost to Ford and Ram last quarter -- without having to resort to big discounts for its brand-new products.
Nevertheless, investors should keep an eye on GM's full-size truck sales for the rest of 2019. If the expected sales rebound doesn't come, General Motors may have to slash production of one of its most profitable products. But as long as full-size truck deliveries do meet expectations, GM is likely to post full-year adjusted EPS exceeding $6.50 for a third straight year.
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