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January 16, 2018

GM chiefs see 2018 profits flat but a better 2019

General Motors forecast 2018 profits would will be largely flat compared with 2017 but higher in 2019 after the redesigned, high margin pickup trucks announced in Detroit this week go on sale in the US.

General Motors forecast 2018 profits would will be largely flat compared with 2017 but higher in 2019 after the redesigned, high margin pickup trucks announced in Detroit this week go on sale in the US.

Reuters said the 2018 earnings outlook was above market expectations, sending GM shares up.

It said GM forecast 2017 earnings per share at the high end of its previously forecast range of US$6 to $6.50. The company expects earnings for 2018 to be roughly the same as in 2017. Analysts had predicted full year 2017 earnings per share of $6.30, and $5.98 a share in 2018.

"If the guidance is as positive as we interpret it, this could be the positive catalyst that we expected, and sets up a solid '18," Barclays analyst Brian Johnson wrote in a client note cited by Reuters.

GM president Dan Ammann reportedly said the new line of pickups should generate improved profit from increased production of higher-priced, four-door crew cab trucks, and expanded sales of luxury models.

GM said in a presentation on Tuesday its Denali line of luxury pickups has average transaction prices of about $55,600, higher than the average for Mercedes-Benz or Cadillac.

According to Reuters, chief executive Mary Barra said during a meeting with reporters the automaker would boost investment in electric vehicles but declined to say by how much.

GM said it expected capital expenditure in 2018 of around US$8.5bn, about $1bn of which would go towards self-driving car technology. In future years, CFO Chuck Stevens said, total capital spending should decrease.

Barra also said GM would not follow other companies that have given employees special bonuses tied to tax cuts by the Trump administration which slashed the top US corporate tax rate.

Instead, Barra said, if GM has higher profits because of lower US taxes, GM employees, including unionised US factory workers, should see larger bonuses or profit-sharing cheques based on existing pay formulas.

In a client note cited by Reuters, Buckingham Research Group analyst Joseph Amaturo wrote GM's 2018 earnings outlook includes a "lower statutory corporate tax rate, so on an apples-to-apples basis, this appears to be an effective EPS guide down.

"We believe the stock will fade after investors understand that the implied EPS guide is for a year on year decline, as we and consensus are forecasting," Amaturo wrote. GM faces challenges in 2018 from the costs of launching the new large pickup trucks, rising interest rates in the United States and a likely decline in overall U.S. vehicle sales, Stevens said, according to Reuters. However, wage growth could offset the impact of higher interest rates for consumers buying vehicles.

Barra, Ammann and Stevens declined to say when investments in self driving vehicle services and electrification would return profits. They pointed to the potential for new trucks and SUVs, a new, low-cost car for international markets, and the Cadillac luxury brand, to improve future earnings, Reuters noted.

Cadillac profits should double from current levels by 2021, GM said, thanks to growing sales in China and new products planned for the US to replace a current line of slow selling saloons. Stevens did not disclose current profit figures for Cadillac.

According to Reuters, GM also said on Tuesday that while it retools a factory in Fort Wayne, Indiana, to make the new pickup trucks, it would shift some production to Oshawa, Ontario, Canada to build up to 60,000 vehicles and avoid missing sales.

The automaker also said it would book a $7bn non cash charge for its Q4 2017 earnings related to deferred tax assets that would lose their value because of the lower US corporate tax rate.

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