General Motors (NYSE: GM) is set to report its fourth-quarter and full-year 2017 earnings on Tuesday, Feb. 6. What should we expect?
What Wall Street expects
Analysts polled by Thomson Reuters expect GM to report fourth-quarter earnings of $1.38 per share, on average, up from $1.28 per share in the fourth quarter of 2016. But they expect a decline in revenue, to $38.55 billion, on average, down from $43.92 billion in the year-ago period.
An aerial photo of the top of the GM Renaissance Center, a cylindrical skyscraper in downtown Detroit, showing the large "GM" logo at the top of the building.
General Motors' global headquarters in Detroit. Image source: General Motors.
We know GM's fourth-quarter result will be strong
When GM gave its initial guidance for 2017 early last year, it said that it expected its adjusted earnings per share to be somewhere between $6 and $6.50 for the full year. ("Adjusted" is GM-speak for "excluding special items").
CFO Chuck Stevens updated that forecast during GM's third-quarter earnings report in October, saying that he expected GM's full-year results to fall roughly in the middle of that range.
But Stevens took it up a notch during GM's 2018 guidance presentation on Jan. 16 saying, "We expect to deliver record earnings per share at the high end of the $6 to $6.50 range, which is an increase from our prior guidance."
What's that likely to mean for GM's fourth-quarter result? Well, through the first three quarters of 2017, GM earned $4.91 per share on an adjusted basis. If we assume that the "high end of the range" is somewhere between $6.40 and $6.50 for the full year, that suggests GM's fourth-quarter adjusted earnings per share will fall between $1.49 and $1.59.
That would be a nice year-over-year increase, and it would beat Wall Street's consensus estimate. It would also be a sharp contrast with old rival Ford Motor Company's (NYSE: F)19% decline in fourth-quarter operating profit.
The slide shows that GM expects to meet its 2017 guidance for adjusted EBIT, EBIT margins in North America, equity income from its Chinese joint ventures, profitability in South America, reduced U.S. inventory, and cash returned to shareholders. The slide indicates that GM could miss its guidance on one point: adjusted automotive free cash flow.
A slide from Stevens' presentation on Jan. 16, previewing GM's full-year 2017 results against the guidance it gave at the beginning of the year. Image source: General Motors.
In fact, Stevens said that GM's 2017 result will deliver on nearly all of the guidance it gave at the beginning of last year, with one exception:
Once again, in North America, we expect 10-plus percent margins for the third straight year. Another strong year of equity income in China. A profitable business in South America and significantly reduced inventory in the United States. In fact, down almost 90,000 units year-over-year. We ended 2017 with just over 60 days' supply, which gives us a very strong launch point going into 2018.
GM cut production at several factories in the third quarter in order to reduce swelling inventories of several models. That reduced its cash flow, and likely its full-year revenue -- but as Stevens noted, GM was able to get its inventories under control by year-end.
But GM will take a whopper of a special item
GM's adjusted earnings per share and adjusted earnings before income and taxes will almost certainly both be strong for the fourth quarter and the full year. But that "adjustment" will be a whopper this time around: Stevens warned that GM will take a one-time charge of $7 billion in the fourth quarter.
There's no need to panic, as that's strictly an accounting charge related to the new tax laws in the United States. GM has for several years carried what it calls "deferred tax assets" on its balance sheet. These are tax deductions that GM is entitled to take because of its huge losses during the last recession.
GM hasn't lost those tax assets entirely. But they're worth less under the new tax code, simply because the U.S. corporate tax rate has been cut from 35% to 21%. The $7 billion charge is an accounting change reflecting that lost value. It won't affect GM's cash levels.
Long story short: GM probably had a good year in a tough market
GM's full-year adjusted earnings before income and taxes should be roughly equal to the $12.5 billion it earned on a "continuing operations" basis in 2016 (meaning, excluding results for GM's Opel subsidiary, which was sold in mid-2017). And its adjusted earnings per share should be up from the $6.12 it earned on a continuing operations basis in 2016.
(How can earnings per share rise if EBIT is flat? Simple: GM has fewer shares outstanding than it did a year ago. It appears that GM bought back about $1.5 billion worth of its shares in 2017.)
I think $1.49 is a good estimate for GM's fourth-quarter adjusted earnings per share. That would handily beat Wall Street's estimate -- but remember that CEO Mary Barra loves to under-promise and over-deliver: Don't be surprised if GM's result comes in a bit higher.
