GM's Q1 - Analysts Likely To Look Beyond $1.6 Billion Charge

By Angelo Young - Top automakers are relying heavily on Chinese and American customers to offset ongoing sluggishness in Europe, which is good for General Motors thanks to its outsized presence in both markets that is helping offset losses linked to its massive global recall and German restructuring costs.

The cost of recalling 6.3 million vehicles worldwide, including 2.6 million cars in North America linked to a faulty ignition switch, is expected to feature prominently when General Motors Co. NYSE:GM releases before markets open in New York on Thursday its sales and earnings for the first three months of the year.

Analysts polled by Thomson Reuters estimate the world’s third-largest automaker will show first quarter net income of $134.6 million, or 9 cents per share, compared to $983.5 million in the same quarter last year. The significant drop is related to the company’s decision to book charges in the first three months of the year rather than spreading them out. That amounts to at least a $1.6 billion hit, excluding a special $400-million charge linked to Venezuela’s currency devaluation and the halt in production at the company’s two factories there.

“That’s why you’re seeing such a large falloff in profit right now,” said David Whiston, senior auto equity analyst at Morningstar, Inc. “If you factor in the $1.3-billion pre-tax charge [for recall-related expenses], that should explain the bulk of the charge.”

GM says the charge will cover all costs related to repairing recalled vehicles and offering about 13,000 loaner cars to customers affected by the ignition switch recall, which has been linked by the company to at least 13 deaths.

Chuck Stevens, GM’s chief financial officer, said in a conference call in February the company would  booking as much as $380 million of the $1.1 billion the company said it would spend this year in Europe, mainly to shut down its Opel factory in Bochum, Germany. These three charges will come to about $2 billion for the quarter.

Despite these costs, the company’s first quarter revenue is forecast to have increased 4.2 percent to $38.43 billion, a rate of growth that has analysts looking past the recall to the company’s core performance connected largely to selling more higher-margin trucks and SUVs in North America. GM reinitiated a quarterly dividend in March for the first time since the company emerged from Chapter 11 reorganization in June 2009 and held its initial public offering in November 2010.

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“We remain constructive on GM and believe the current valuation presents a buying opportunity in the back half of the year,” Patrick Archambault and David Tamberrino, Goldman Sachs autos analysts, in a research note.

Market watchers believe the GM recall offers an opportunity for investors to buy or stay long on the company’s stock, which has shed nearly 17 percent since the start of the year, closing at $33.98 on Monday. “As a reminder of where we stand on GM shares: going long GM is our top investment idea,” JPMorgan analysts Ryan Binkman, Samik Chatterjee and David Kanovsky, wrote in a research note earlier this month.