– Reports Q4 2018 results on Wednesday, February 6, before the open
– Revenue Expectation: $36.48 billion
– EPS Expectation: $1.22
General Motors (NYSE:GM) may not have much more to impress investors when it releases its fourth-quarter earnings report next week. Earlier this month the automaker issued surprise pre-result guidance that showed it is set to reap the benefits of its restructuring drive and solid performance of its top-selling models.
On January 11, GM came up with a very bullish projections for 2019, defying market expectations that a slowdown in China and higher material costs would crimp profits for automakers, who have already seen the peak of this economic boom.
General Motors (GM) – 1-Month Chart
According to GM’s forecast, 2019 adjusted earnings will rise to between $6.50 and $7 a share, easily exceeding analysts’ estimates of $5.92. The Detroit-based company also said it will exceed the high end of its profit forecast for last year, which was $6.20 a share.
Cost cuts, including the potential closing of five plants in North America this year, will boost 2019 profit by as much as $2.5 billion, according to the company. Chief Financial Officer Dhivya Suryadevara told reporters the series of restructuring moves GM has planned will boost profit by a total of $6 billion by 2020.
These bullish estimates were enough to propel GM shares in the first month of 2019, pushing its stock more than 16% higher and cutting its one-year losses to around 8%.
But the road ahead isn’t as clear as GM CEO Mary Barra is forecasting.
In our view, she has done a great job in setting the company’s direction at a time when traditional carmakers are facing strong headwinds, both cyclical and secular.
In the near term, U.S.-China tariffs will soon begin to pinch GM earnings if both countries fail to resolve their dispute. U.S. auto sales, on the other hand, peaked in 2016 and have been falling ever since. This metric could come down yet further if consumer demand slows in China and globally. In the third quarter ended September 30, GM posted a 15% drop in deliveries to China.
As well, President Donald Trump’s threat to eliminate subsidies for GM in response to its announcement of job cuts and plant closings in the U.S. is likely to be a drag on the stock.
Aside from these macro risks, GM is also facing disrupters like Tesla (NASDAQ:TSLA) and Alphabet’s driverless car unit, Waymo, which started developing autonomous car technology almost a decade ago and is way ahead of the game.
The ascent of the sharing economy means potentially fewer cars on the road. As these trends accelerate over the next few years, they could further depress the desire for car ownership, reducing the size of the market and the market share of individual carmakers.
GM’s new bet on electric and driverless cars will keep the company in the race. But success isn’t guaranteed. GM is competing with some deep-pocket rivals, such as Google (NASDAQ:GOOGL). For now, the revenue that drives GM’s hefty dividend, which currently yields about 4%, is coming from gas-guzzling SUVs and trucks.
Barra deserves credit for keeping margins healthy with flat sales and positioning the company favorably for the future of mobility. But auto stocks aren’t a good space to be in right now with so many risks lurking.
In our view, GM’s stock is a good short-term trade, suitable for buy-low-sell-high investors. Betting on this stock for long-term gains hasn’t yielded much for investors in the past, and the future doesn’t look that bright as Barra predicts.