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GM's Focus on Selling to Actual Consumers Paying Off for Profits

July 25, 2017
GM Chief Executive Officer Mary Barra has pushed GM to pivot away from a longtime reliance on bulk shipments of discounted sedans to rental fleet companies.

General Motors Co.’s strategy of shunning discounted sales to rental-car companies to focus on more profitable deliveries of pickups and SUVs to U.S. consumers is boosting its bottom line.

Adjusted earnings of $1.89 per share in the three months ended in June beat analyst estimates of $1.70 a share. The largest U.S. automaker sold a richer mix of sport utility vehicles and trucks to retail buyers and cut costs during the quarter in North America.

Chief Executive Officer Mary Barra has pushed GM to pivot away from a longtime reliance on bulk shipments of discounted sedans to rental fleet companies like Hertz Global Holdings Inc. and Avis Budget Group Inc. The automaker has to continue showing it can improve the health of its business beneath the surface as the U.S. auto market shrinks after years of growth.

“Disciplined and relentless focus on improving our business performance led to a strong quarter and very solid first half of the year,” Barra said in a company statement Tuesday.

GM shares have risen 2.8% this year to close at $35.82 Monday, trailing the 10% jump in the benchmark S&P 500 Index. Barra sidestepped a challenge from billionaire David Einhorn’s Greenlight Capital during the quarter, with shareholders voting down the hedge fund’s proposal to split the stock into one class that collects on GM’s dividend and the other on its earnings.

No Love From Investors

“It’s been tough for GM to get any love amid the cycle talk,” Brian Johnson, a Barclays analyst, wrote in a note to clients Monday. “Even despite positive headlines, investors won’t give GM much credit.”

As GM abandons less profitable aspects of its business at home, Barra also has been making a years-long effort to exit foreign markets where the company fails to earn consistent profit.

For the first time, GM reported European units including the Opel and Vauxhall brands as discontinued operations. The company expects the sale of those operations to PSA Group will close before the end of the year and that costs of the transaction will contribute to a special charge of about $5.5 billion.

In May, GM said its Chevrolet brand will exit the India market and that its operations there will refocus on exports. Isuzu Motors Ltd. is taking over GM’s manufacturing operations in South Africa, adding to departures under Barra from the Venezuela and Russia markets.

Inventory Risk

By leaving many overseas markets, GM’s earnings have become even more dependent on its performance in North America. One risk to the company’s business in the region is the more than 100 days’ worth of vehicle supply on dealer lots in the U.S. That’s about a month more inventory than the industry average.

While some of the inventory buildup has been purposeful, GM has also scheduled summer shutdowns and cut shifts at plants making passenger cars that are struggling to draw buyers.

GM has 13 weeks of downtime scheduled this year at factories that need to be prepared to build fresher pickups and sport utility vehicles. It’s cut a shift at four car-assembly plants and a fifth is scheduled for September.

By Jamie Butters

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Licensed content from Bloomberg, copyright 2016.

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