GM Profit Outlook Signals Note of Caution on Chip Dearth

(Bloomberg) -- General Motors Co. provided a cautious profit-growth forecast for 2021, reflecting anticipated damage from a semiconductor shortage reverberating throughout the global auto industry.

The Detroit-based company expects continued income growth this year after reporting a strong fourth quarter but warned of headwinds from the semiconductor shortfall that has cut its production at three plants in North America.

Mary Barra, GM’s chief executive officer, vowed the automaker will shield its highest profit margin vehicles from the chip fallout.

“We’re doing everything possible right now so we won’t lose any production throughout the year for full-size trucks and SUVs,” she said.

Read more: Chip Shortages Force More Cuts at North American Auto Plants

Shares of the carmaker pared a drop of as much as 6.3%, falling 3.6% to $54.03 as of 11:51 a.m.

“The guidance was below expectations and there are headwinds like the semiconductor shortage and commodities prices,” Jeff Windau, an analyst with Edward Jones who has a hold rating on the stock, said in a phone interview. “The shares have had a nice run, but we’re entering a time period where they are spending a tremendous amount on future growth initiatives and we have these headwinds coming.”

Chip Scarcity

Semiconductor makers have allocated more capacity to consumer products, forcing carmakers to scramble to secure adequate supplies. A faster-than-expected recovery in U.S. vehicle demand in recent months has exacerbated that supply pinch. Consultant AlixPartners said the global chip shortage could cost automakers $61 billion in lost sales this year.

The carmaker said the shortage will shave $1.5 billion to $2 billion off its adjusted earnings in 2021. It has been forced to idle three plants until mid-March and build some vehicles without certain modules at other factories, holding them until more chips come in.

GM sought to downplay the damage, saying it views chip scarcity as a temporary setback.

“We do not believe this short-term headwind will affect our long-term earnings power,” Paul Jacobson, the company’s chief financial officer, said on a call with analysts. “The underlying business has never been more robust.”

The automaker is diverting chips from less popular vehicles to its best-sellers to mitigate the balance sheet and market impact, he said.

GM forecast adjusted earnings before interest and taxes of $10 billion to $11 billion in 2021, which translates to adjusted earnings per share of $4.50 to $5.25. That compares with $4.90 a share and $9.7 billion in adjusted earnings last year.

Strong demand for its vehicles and a rapidly unfolding push into EVs will help the automaker power past the temporary chip challenge, Dan Levy, an analyst with Credit Suisse who has an outperform rating on GM’s stock, wrote in a research note. “We believe investors should look past the soft guide.”

Deferred Dividend

GM previously indicated it would reinstate its suspended dividend payment by mid-2021, but Barra deferred comment about that when asked on the analyst call. “You’ll hear more from us later in the year as it relates to the dividend,” she said.

The company canceled its dividend and a share-buyback program in April to preserve cash amid the onset of the coronavirus.

GM is benefiting from a recovery in U.S. demand after a pandemic-induced shutdown early last year and also signs of improvement in China, the world’s largest car market. GM’s market share grew in both countries in the last three months of 2020.

The automaker’s latest results capped a tumultuous year after it weathered the worst of the Covid-19 crisis and outlined a bold move to exit gasoline-powered cars. Adjusted profit came to $1.93 per share in the fourth quarter, surpassing analysts’ consensus estimate of $1.56, thanks to strong demand for its pickup trucks and large sport-utility vehicles.

In North America, GM reported a quarterly adjusted income before interest and taxes of $2.6 billion and a margin of 8.7% after running its truck and SUV plants full out.

EV Transition

Profits in the Chinese market came to $248 million on a 37% jump in revenue to $14.1 billion. That still lags behind just a couple of years ago, when GM used to make $2 billion a year, but Barra told reporters she expects better days are ahead for its brands.

“As the industry recovers and we roll out SUVs, we can get to levels that we’ve had in the past,” she said.

GM plans capital expenditures this year of $9 billion to $10 billion -- with $7 billion of that earmarked for programs such as electric and autonomous vehicle development. That tops rival Ford Motor Co.’s $6.5 billion capital-spending budget for 2021.

Shares of both companies have rallied recently on heady investor expectations for the auto industry’s shift to EVs. The challenge for established carmakers is to wean themselves from dependence on profits from gas-guzzling SUVs and trucks.

The industry is working to reduce battery and other costs, but margins on EVs won’t likely reach parity with gasoline-powered cars until the “mid- or later part of the decade,” Barra said in an interview with Bloomberg Television.

Semiconductor Scramble: Here’s how the shortage is affecting some of the industry’s biggest players.:

Carmaker	Impact
GM	May lower adjusted Ebit by $1.5b-$2b this year Extended downtime at three North American plants
Ford	May reduce adjusted Ebit by $1b-$2.5b this year Models affected include F-150 trucks in U.S. and Focus cars in Germany
Stellantis	Has temporarily idled plants in U.S., Canada, Mexico and Germany
Toyota	Trimmed output of Tundra pickups in U.S. by about 40% last month
Volkswagen	Losing significant output in China and Germany
Nissan	Pared production of pickups in the U.S. and hachbacks in Japan
Honda	Considering cuts in China and has reduced output across North America and in the U.K.
Daimler	Mercedes-Benz output has been affected
Tesla	Warned there may be a temporary impact on production

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