General Motors expects its next-generation Chevrolet Silverado and GMC Sierra pickups to be significantly more profitable than today’s model, providing an earnings kick that will help fund its $1 billion-a-year investments in new mobility technologies like electric and autonomous vehicles while leaving billions more for shareholders.
GM already makes most of its profits from trucks and SUVs, but by adding more pickups at the low and high ends of the market, as well as more four-door crew cab models for recreational buyers, it will see “meaningfully” higher profits from its next-generation trucks, said company president Dan Ammann.
But the 2019 models, introduced this week at the Detroit auto show, go on sale at the end of the year, which means those improved profits won’t really kick in until 2019 and beyond.
In the meantime, GM will face headwinds from the cost of launching those trucks, along with pricing pressure in the U.S. and China, falling used-car values and slightly lower U.S. demand. Offsetting those pressures, GM expects to benefit from a full year of profits from recently launched crossover vehicles, better cost controls and improvements elsewhere in its business.
It all adds up to what is likely to be a strong year in 2018, about flat with 2017’s expected record results, the company said today. GM forecast that it expects to report a third year of record earnings for 2017, at the high end of its previously announced range of $6.00 to $6.50 earnings per share diluted-adjusted. But after a flat 2018, GM expects profit growth to accelerate in 2019.
“GM had a very good 2017 as we continued to transform our company to be more focused, resilient and profitable,” GM Chairman and CEO Mary Barra said. “We are positioned for another strong year in 2018 and an even better one in 2019.”
“Reshaping the company over the last few years has allowed us to deploy resources and capital to higher-return opportunities, including our next-generation trucks and establishing leadership in the future of mobility,” Ammann added. “The all-new full-size truck family that launches this year will generate very strong returns for years to come.”
It’s been less than a decade since America’s largest automaker required a taxpayer bailout to emerge from bankruptcy. Since then, the company has struggled to convince Wall Street that it is a fundamentally different company today, especially amid industry disruption from new competitors like Tesla, Uber and Waymo. Investors also fear that U.S. auto sales have peaked, meaning a downturn is ahead.
But by demonstrating the health of its core business while simultaneously positioning itself as a mobility leader, GM aims to prove that it is in the best position to survive – and thrive – in the new competitive environment.
And investors are starting to believe it. “It’s almost as if there has been a 180-degree change in the narrative in just over a year,” said Morgan Stanley analyst Adam Jonas. GM shares were up almost 3 percent this morning, on news of the company’s bullish outlook. From a low of about $32 last May, GM shares have climbed about 40 percent, to around $45 per share.
Under Barra, GM has built a credible track record of delivering on its promises. The company has shed unprofitable businesses around the world like Opel/Vauxhall in Europe, while funneling money into growth opportunities like autonomous cars, transportation as a service, and electrification. The result has been three years of record profits, including 10 percent margins in its core U.S. business.
GM’s truck franchise – including mid-sized pickups like the Chevrolet Colorado, full-sized trucks like the Silverado and GMC Sierra, and truck-based SUVs like the Chevrolet Tahoe and Cadillac Escalade – is its foundation, representing a $65 billion high-margin business.
But GM executives admit the company hasn't maximized its profit opportunity from that business because it has focused mostly on the middle of the market, selling trucks priced $35,000 to $55,000. By widening its lineup to include not only entry-level trucks but also more luxurious models like the GMC Denali trim level, it expects to accelerate its truck profits.
Just boosting the number of four-door crew cabs from 60 percent of sales to the industry average 70 percent, will help close a pricing gap with Ford’s F-series pickups, GM said. Ford says the average transaction price on its pickups is $47,800 per truck, up $3,400 from a year ago. Some of Ford's most luxurious heavy-duty pickups are selling for close to $100,000.
GM is optimistic for other reasons. The strong economy, with an extra push from recent federal tax cuts, means auto sales will remain healthy. GM also expects Cadillac profits to double by 2021 with new crossover models and continued growth in China, and it anticipates improvements in GM's international businesses, including South America, as well as growth from adjacent businesses like Onstar, aftersales and its GM Financial lending unit.
That profit growth will help fund increased investment for future autonomous vehicles - approximately $1 billion annually, up from $600 million in 2017 - and continued capital expenditures of $8.5 billion a year, while allowing GM to keep distributing cash to shareholders through dividends and share buybacks. In the past five years, GM has returned $25 billion to shareholders, and has a further $3.5 billion in authorized share buybacks still to come.
GM officials aren't saying when they expect to start making money from autonomous cars and mobility as a service, but Ammann has suggested it is a multi-billion-dollar business opportunity. "In order to get there, we have to safely deploy the technology at scale," he said and GM is fully focused on doing that by 2019.
In the meantime, it's clear pickup trucks will continue pumping out plenty of cash to fund GM's future ambitions — and that's not going to change anytime soon.
