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GM Strike Forces Big Guidance Cut, but Strong Q3 Profit Bodes Well for 2020

Last week, General Motors' (NYSE: GM) UAW-represented workers ratified a new four-year contract agreement by a 57% to 43% margin. The new deal provides substantial raises and a clearer path to permanent employment for temporary workers in exchange for permitting the company to close three unneeded factories.

Following ratification of the deal, General Motors has been able to restart production at its factories in the U.S. (and other plants in North America that were affected by the strike). The damage was done, though. This six-week work stoppage -- the longest strike by the General's workforce in nearly half a century -- forced the company to dramatically slash its 2019 guidance on Tuesday. Fortunately, GM reported strong Q3 results at the same time, which suggests that the automaker will bounce back with an excellent performance next year.

The Q3 numbers are great

For the third quarter, GM's revenue dipped 0.9% year over year to $35.5 billion, as the strike halted domestic production near the end of the period and international revenue fell due to economic weakness in many markets.

Remarkably, the company actually increased its adjusted operating profit in North America to $3 billion last quarter -- up from $2.8 billion a year earlier -- despite the impact of lost production due to the strike and a big one-time warranty charge. An improved mix and strong pricing for GM's pickups and crossovers offset these negative factors.

A white Chevy Silverado pickup driving on a rural road

Strong demand for the General's trucks and crossovers boosted GM's profit in North America. Image source: General Motors.

Nevertheless, General Motors' adjusted operating margin slipped to 8.4% from 8.8% a year earlier, due to weakness outside of North America. This drove a 5.9% decline in adjusted operating profit (to $3 billion) and an 8% decline in adjusted earnings per share (to $1.72). That still beat the average analyst EPS estimate of $1.31 by a country mile. Excluding the strike impact and noncash adjustments to the value of GM's stakes in Lyft and Peugeot, adjusted EPS would have soared to a record $2.39.

But guidance tumbles due to lost production

GM lost two weeks of production at its U.S. factories last quarter, and some of its other plants in North America eventually had to shut down because they ran out of parts built in the U.S. By contrast, General Motors has had nearly a month of unplanned downtime in the fourth quarter, and the impact on factories in Canada and Mexico was even greater. Additionally, management said that it won't be possible to recover much of the lost production in 2019, given that many of the factories that build GM's most profitable products are already running flat out.

As a result, General Motors cut its 2019 forecast dramatically on Tuesday. It now projects full-year adjusted EPS between $4.50 and $4.80, compared to its previous guidance range of $6.50 to $7.00. This implies that the company will break even or possibly post a small adjusted loss in the fourth quarter.

GM also expects the strike to hurt its free cash flow by about $5.5 billion this year. It has offset some of that headwind by reducing its planned 2019 capital expenditures by about $1 billion, but the General still expects to generate no more than $1 billion of adjusted automotive free cash flow in 2019. Its previous guidance had called for adjusted automotive free cash flow between $4.5 billion and $6 billion.

A good setup for 2020

While the strike is set to spoil General Motors' performance in 2019, the outlook for 2020 is quite favorable, despite potential headwinds like lower U.S. auto sales and economic weakness in some international markets. First, the company will get a full year of production of several key models, including its next-generation heavy-duty trucks, the all-new Corvette C8, and the Cadillac XT6 crossover.

Second, General Motors will exit 2019 with below-target inventory in North America. This reduces the likelihood that it would have to trim production sometime in 2020 to match supply to demand, notwithstanding the potential for U.S. auto industry sales to decline modestly in the year ahead.

Third, the new UAW contract has preserved most of GM's estimated cost savings from shrinking its U.S. manufacturing footprint. The company expects to save between $4 billion and $4.5 billion annually in North America, and much of that savings has already been achieved.

Together, these factors give GM a good chance to surpass the current analyst consensus for 2020 EPS of $6.61. Moreover, the automaker is poised to recapture some of its lost volume from 2019, reverse the working capital changes that are hurting cash flow this year, and further reduce capex, driving a surge in free cash flow next year. Thus, investors have a lot to look forward to now that the UAW strike has ended at General Motors.

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Adam Levine-Weinberg owns shares of General Motors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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