General Motors Co. GM 4.93 % posted flat net income in the third quarter as record operating profit in its core North American unit helped offset $ 1.5 billion in costs it shouldered to resolve an ignition-switch crisis that emerged more than 20 months ago.
The Detroit auto maker, benefiting from robust demand for profitable trucks and SUVs, reported $ 1.36 billion in net income attributable to stockholders in the period, or 86 cents per share, flat with the same period a year ago. Adjusted earnings per share of $ 1.50 solidly outpaced Wall Street expectations for $ 1.19. The company reported a postbankruptcy record operating profit for the global business of $ 3.1 billion in the July-through-September period, up 40% from the like period in 2014.
GM shares traded up around 4% in early trading. Credit Suisse analyst Dan Galves said in a note Wednesday morning that GM’s third-quarter results indicate that the auto maker could be on pace for a much stronger 2016 than expected. He said the company is making meaningful headway on implementing costs cuts, and to expect additional action on that front.
Revenue dropped 1% to $ 38.8 billion on slipping volumes in China and $ 2.3 billion in negative impact from currency exposure.
The results come as GM faces choppy waters abroad. Among the largest players in China, the company has seen volumes in that market shrink amid wider industry weakness that is fueling concern about emerging markets. Dismal conditions in Russia and Brazil contributed to losses in Europe and South America.
Even as China volumes sag, GM remains healthy in the world’s largest car market, Chief Financial Officer Chuck Stevens said while addressing reporters early Wednesday. The company’s 9.8% equity net income margin in China was down from a stronger second quarter, but increased modestly vs. a year-ago. Equity income of roughly $ 500 million from China operations was roughly in line with the company’s typical quarterly results.
GM is benefiting most from its leading position in the U.S., and reaping benefits from American buyers’ flocking to pickup trucks and SUVs. As U.S. auto sales set the highest pace in more than a decade, GM’s operating profit from the region hit $ 3.3 billion for the quarter. It rose to $ 8.3 billion for the entire year, or nearly double the result from nine months in 2014.
Strong profit at home sets the stage as GM negotiates a new contract with the United Auto Workers union. UAW workers vote Wednesday on a revised agreement with Fiat Chrysler Automobiles FCAU -3.35 % NV, and Mr. Stevens—declining to talk in depth on contract negotiations—said GM will design its contract to meet the unique financial needs of the auto maker’s business.
GM owns about a 25% share of the U.S. truck market, and vehicles like the Chevrolet Silverado pickup and Cadillac Escalade SUV are richly profitable. The success of these vehicle lines propelled GM’s North American margins well north of 11% in the third quarter, and led the auto maker to pull ahead by one year its target for reaching an annual margin in the region of 10%.
The auto maker does have a weak spot in the U.S. Its market share for passenger cars, such as midsize sedans or compact cars, fell to 11.5%, down from 13.3% a year ago. Through nine months, GM’s U.S. car market share is down 2% from one year ago to 12.3%. Strong sales of pickups and SUVs have offset the decline in cars, but GM’s overall market share in the U.S. was down modestly vs. one year ago to 17.1%.
Global market share also slipped from 11.6% to 11.2% thanks to largely to a 2.3% drop in South America.
GM Europe inched closer to breaking even, losing $ 231 million in the third quarter compared with $ 387 million one year ago. Mr. Stevens reiterated that GM will be profitable in Europe next year, citing strong sales of its two most popular European models, the Opel Corsa and Astra.
The net income was negatively affected by charges of $ 900 million related to a deferred prosecution agreement with the Justice Department, and $ 600 million in settlements paid for civil actions related to product recalls in 2014.
RBC Capital analyst Joseph Spak called it “a very solid report from GM,” citing strong margins in China despite a potential price war in that market. Mr. Spak said the only negative is that free cash flow is now expected to remain flat compared with 2014, after GM previously predicted it would be up slightly.
“We are of the belief that consistently strong execution is needed to drive [the stock’s] multiple higher,” Mr. Spak said in a note. “This print is a step in the right direction. We expect the stock to outperform today.”
GM’s adjusted automotive free cash flow increased to $ 0.8 billion in the third quarter after the $ 900 million write down for the Justice Department settlement. The auto maker has $ 21.9 billion in cash and marketable securities on hand. Fitch Ratings automotive analyst Steve Brown said in an interview that GM’s plan to keep $ 20 billion in cash on hand is crucial to maintaining an investment-grade rating on its debt.
GM International, which includes the Middle East, Africa and most of Asia, posted a modest increase in profit from $ 259 million to $ 269 million, but losses in South America increased to $ 217 million from a loss of $ 32 million a year ago.