July 23, 2014 at 10:03 pm

GM expected to take $1.2B in recall-related earnings charge

Ford Motor Co. and General Motors Co. will release second-quarter earnings Thursday that each are expected to fall short of last year’s second quarter. As part of that process, GM is expected to give a potential cost estimate for a victim compensation fund related to its recall of 2.59 million cars with ignition switch defects that have been linked to at least 13 deaths.

GM is expected to take a $1.2 billion charge against second-quarter earnings for all recall-related charges. Analysts expect GM to earn about 58 cents a share in the quarter, down from 84 cents a share it earned in the same period a year ago. The second quarter of 2013 — in which GM posted a $1.2 billion profit — included 9 cents per share of special charges.

But some analysts recently have increased their earnings outlook for GM’s second quarter of 2014, based on higher than expected production, sales and strong North American pricing on newly designed SUVs and heavy-duty pickups.

J.P. Morgan analyst Ryan Brinkman, in an investment note this week, said he revised GM’s earnings outlook from 51 cents a share to 55 cents a share: “ATPs (average transaction prices) are through the roof and we expect ‘Suburban-sized’ GMNA (General Motors North America) profits.”

Citi Research analyst Itay Michaeli, in a recent research note, also said GM may beat expectations in the second quarter, excluding recall costs and may offer a reassuring outlook. Michaeli thinks GM’s North America margin could hit 11 percent in the quarter excluding recall costs. He boosted his GM stock price target to $48 from $47, and is looking for GM to earn 63 cents a share in the quarter.

GM stock closed Wednesday at $37.41, down 35 cents.

GM Chief Financial Officer Chuck Stevens told analysts in early June that GM would treat an estimated cost of the victim compensation program as a special item and it hoped to include it in second-quarter earnings. He said the figure would be adjusted as claims are paid.

The fund is being independently run by compensation expert Kenneth Feinberg and will begin to accept claims Aug. 1. But it’s not likely that GM will get a final tally on compensation for about a year based on the payout schedule Feinberg has established.

“Any GM estimation is ‘purely speculative,’ until I examine submitted claims and make appropriate determinations as to both eligibility and valuation,” Feinberg said in an email.

Recall-related charges of $1.3 billion hurt GM’s first-quarter earnings as the automaker posted a slim $125 million profit. GM has been profitable for 17 straight quarters.

Analysts expect Ford to earn between 34 and 36 cents per share, down from 45 cents per share during the same period a year ago. They expect Ford to post North American profits ranging from $2.2 billion to $1.9 billion. This time last year, Ford posted a $2.3 billion North American profit.

Most analysts say the decrease can be attributed to the automaker’s aggressive product launch. This year, Ford plans to introduce 23 new vehicles globally, the most in the company’s history. Last year, Ford warned pretax profits in 2014 would likely fall between $7 billion and $8 billion, down from $8.6 billion the year before.

The most critical of the launches will be the 2015 F-150, an aluminum-body pickup that will debut in the fourth quarter. Tooling and materials will be more expensive, and Ford has increased production of its 2014 model as it prepares for the changeover.

“The unknown with Ford revolves around the impact this capital spending and product launch expense will have on profit margins through 2014,” David Kudla, CEO and chief investment strategist at Mainstay Capital Management, said.

Ford’s first-quarter profit dropped nearly 39 percent as the automaker set aside more than $400 million to cover future expenses of recalls, safety claims and customer service-related improvements.

It posted a profit of $989 million during the first three months of 2014, down from $1.6 billion during the same period a year ago. First-quarter revenue rose slightly to $35.9 billion from $35.6 billion.

Ford stock closed Wednesday at $17.78, down 4 cents.

Staff Writer David Shepardson contributed.