GM CEO Mary Barra will see a sharp decline in earnings for her first full quarter as CEO.
The numbers aren’t likely to look very good when General Motors and Ford Motor Co. release their first-quarter earnings results this week, both makers expected to post sharp declines from year-ago levels.
Ford had signaled a likely slide late last year as a result of the numerous new product launches it will have in 2014. But GM’s anticipated downturn is likely to be significantly greater than first forecast as a result of its on-going recall problems – an issue expected to continue to haunt new CEO Mary Barra for some time to come.
A consensus of industry analysts forecasts GM will deliver a meager 9 cents per share in earnings for the first three months of 2014, and Brian Johnson, an automotive analyst with Barclays Plc is even more bearish, predicting the U.S. giant will go a penny into the red. Prior to the announcement of GM’s initial ignition switch recall in mid-February, Johnson was looking at a profit of 20 cents, which would still have been down sharply from the 67 cents per share it earnings during the first quarter of 2013.
“We continue to expect a ‘kitchen sink’ quarter for GM,” Johnson said in a note to investors.
In fact, GM recently announced it would take a $1.3 billion write-down for the cost of the many recalls it announced during the January-to-March quarter. Much of that loss covers the 2.6 million vehicles recalled because of a defective ignition switch, but all told, GM was forced to announce safety-related repairs to about 7 million vehicles during the first quarter – about a third as many vehicles as the entire industry recalled for all of 2013.
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Add to that another $400 million the maker will take as a pre-tax charge due to changes in Venezuela’s currency. And it is expected to take additional losses in Europe where it is continuing to struggle for a turnaround after 14 years of losses collectively totaling $18 billion.
Things weren’t supposed to go this way. Since launching its IPO in November 2010, GM’s earnings have been on a generally upward trajectory, the maker posting record earnings of $9.19 billion in 2011 and many analysts projecting it could top $10 billion this year. But the consensus of 14 analysts surveyed by Bloomberg now puts this year’s forecasts at a comparatively meager $5.58 billion.
And there are growing concerns about just how much financial damage, long-term, the recall crisis could cause. Earlier this week, GM asked a bankruptcy judge in New York to dismiss any lawsuits asking for financial compensation for simply owning a vehicle equipped with one of the defective ignition switches.
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Under terms of the deal that helped it emerge from its bankruptcy, GM is protected from lawsuits – including wrongful death and injury claims – that occurred before July 2009. But the maker is facing heavy pressure to either wave that immunity or set up a victims’ compensation fund.
Meanwhile, it is widely expected GM will face hefty fines by the National Highway Traffic Safety Administration for delaying the ignition switch recall by as much as a decade since first learning there might be potential safety problems. And it could face even larger penalties should the U.S. Justice Department move forward with a criminal probe of those delays. In March, Toyota paid $1.2 billion in fines for delaying several recalls in 2009 and 2010.
The recall crisis has been a heavy burden on new GM CEO Mary Barra who has apologized repeatedly and promised that the “new GM” will not repeat past mistakes. She has appointed a new safety czar, put several senior engineers linked to the ignition switch debacle on paid leave, and ordered other management shake-ups.
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Ironically, the year began on a good note for the maker, GM winning both the North American Car and Truck of the Year awards for the 2014 Chevrolet Corvette and Silverado models. It has also been winning third-party kudos from the likes of quality tracking firm J.D. Power and influential Consumer Reports magazine.
Some observers are confident that such developments will, in the long run, be more significant than the headline-generating recalls.
“We remain constructive on GM and believe the current valuation presents a buying opportunity in the back half of the year,” wrote Goldman Sachs’ analysts Patrick Archambault and David Tamberrino in their own investors’ report.
But Adam Jonas, an analyst with Morgan Stanley. Is nowhere near as upbeat. “Since the IPO,” he recently wrote, “GM has executed well in many areas, but overall nowhere near as strong as our admittedly high expectations. There’s just no other way to put it — we were off by a country mile.”
As for Ford, the maker telegraphed the likelihood it would see a decline in earnings this year, following a strong $7.2 billion profit in 2013. A key reason: the costs and disruptions associated with this year’s planned roll-out of 23 new models around the world.
Ford will weigh in on Friday and is expected to deliver a 24% decline, according to a consensus of analysts, to just 31 cents per share compared to the first quarter last year.
But Ford has a fair share of uncertainties that observers will be watching closely, including the apparent decision by CEO Alan Mulally to retire, perhaps by mid-year. He is expected to be replaced by current COO Mark Fields.
Ford also has to prove that those numerous new product launches will pay off, perhaps most notably with the switch to an aluminum-bodied version of the best-selling F-150 pickup for 2015. Ford is also struggling to turn things around in Europe this year, while also launching its weak Lincoln brand in China.