Howes: GM, FCA book fatter profit despite sales plateau

Daniel Howes, The Detroit News

Car and truck sales are plateauing in the lucrative U.S. market, but you wouldn’t know it from the big jump in profits and other financial metrics.

General Motors Co. exceeded Wall Street expectations Wednesday with record net income of $2.8 billion in the third quarter. And Fiat Chrysler Automobiles NV demonstrated that the price for exiting small-car production may not be as high as originally feared.

Bottom line: the good times are not yet over for Detroit’s automakers or their foreign rivals operating in the United States. This town’s auto leaders are just more cautious and more disciplined, determined to avoid past mistakes and show investors that Old Detroit is gone for good.

“We fully expect 2016 to be another record year for the company,” said Chuck Stevens, GM’s chief financial officer. “We expect to generate strong cash flow over the next number of years.”

That’s huge, but not sufficient. Cash flow is tallied after the company makes investments in its core car and truck business, and after its leadership places bets on the mobility technologies of ride-sharing and autonomous vehicles. How are they doing it?

Three numbers, measured in industry-speak, are key. Average transaction prices at GM exceeded $36,000 in the third quarter, the company said, almost $5,000 above the industry average. That’s a clear sign that GM’s bias for retail sales over sales to rental companies is paying off, and that consumers see greater value in GM’s metal.

Second, adjusted operating margins are rising at GM and, to a lesser extent, at FCA to levels this town rarely, if ever, saw (much less consistently) before the global financial meltdown. At GM, North American margins exceeded 10 percent in five of the past six quarters.

And, third, the more the U.S. market skews toward trucks and SUVs amid comparatively low gas prices, the more North American profits are likely to stay robust. That has major — and positive — implications for the Motor City and Michigan in terms of jobs and hiring, salaried bonuses and profit-sharing payouts, a buoyant supplier sector and corporate philanthropy.

Yet another quarter of gangbuster performance still is not, however, enough for investors to jump into the sector. The Dow Jones Industrial Average closed trading Wednesday down a slight 0.3 percent, but shares in GM slid 4.18 percent to close at $31.60; Ford Motor Co. — set to report its third quarter Thursday — closed at $11.85, down 1.58 percent.

“It’s just amazing how under-owned and under-loved the domestic automakers are,” David Kudla, CEO of Grand Blanc-based Mainstay Capital Management LLC, said in an interview. “We do believe the peak auto cycle is here. The best we can hope for is this plateau.”

He continues: “They’re all operating at structural costs that are a lot lower than the last cycle. The margins are pretty incredible for the autos than where they’ve been before.”

Enter the Detroit conundrum. A U.S. market plateau of 17 million to 18 million vehicles a year, thanks partly to low fuel prices and the prospect of more to come, is a market that delivers fat profits because it sells large numbers of trucks and SUVs. Good, right?

Except it’s also a market that demonstrates little upside to investors hungry for the conditions that can deliver growth. As much as Detroit’s U.S. car and truck business is a hard-won story of profitability, it’s not thought much of a growth story — excluding China and the Asia-Pacific region, that is, and the mostly untapped mobility space.

As impressive as their post-meltdown rebound may be, Detroit’s three automakers are burdened by a legacy of denial, mismanagement and capital destruction. And that’s complicated by the indelible fact that theirs is a cyclical industry.

History doesn’t help. But each passing quarter delivers more evidence that these are very different companies led by different executives working in a different world delivering refreshingly different numbers, almost routinely.

With the notable exception of GM’s Chevrolet Bolt electric car, hitting select showrooms before the end of the year, Wednesday’s separate GM and FCA conference calls with the investment community hewed to familiar scripts detailing plant capacity, market conditions and automotive profitability.

Underpinning it all is a nagging sense there’s no winning a race that will never end. Any sign of slowdown, such as Ford’s decision to slow production of its best-selling F-150 pickups and the hit it likely will deliver to Blue Oval profitability, is considered a harbinger of a slowing economy.

Maybe it is, which would be real news in this town. Or maybe it’s Ford paying for its decision on fleet sales. Or honoring again its pledge to tie production tightly to demand. Neither is necessarily a commentary on a market in which GM and FCA both reaffirmed their confidence Wednesday.

This year should be as strong for GM as last year. FCA upgraded its estimates for net revenue, adjusted pre-tax earnings and adjusted net profit for the year. The Italian-American automaker also said its realignment of U.S. production capacity to Ram pickups and Jeep SUVs should deliver “double-digit margins” by 2018.

“The transformation should allow us to achieve best-in-class margins,” CEO Sergio Marchionne said. “It continues to be the single largest shortcoming this house has against the competitor class and it has to be overcome.”

Meantime, expect Detroit’s automakers and their foreign-owned rivals to take advantage of steady market demand, low interest rates and cheap gas for as long as they can — because it’s a virtuous cycle that cannot last forever.

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Daniel Howes’ column runs Tuesdays, Thursdays and Fridays. Follow him on Twitter @DanielHowes_TDN, listen to his Saturday podcasts, or catch him 3 and 10 p.m. Thursdays on Michigan Radio’s “Stateside,” 91.7 FM.