Car buyers think big in 1Q, boosting profit at GM

Staff and wire report

DETROIT

Encouraged by lower gas prices, consumers in the U.S. spent big in the first quarter on vehicles that carry lots of passengers and cargo — and deliver hefty profit margins for General Motors.

The shift to pickups and SUVs helped GM record a $2.18 billion first-quarter profit in North America, its most lucrative market. Tougher conditions in Europe, particularly Russia, and South America whittled GM’s overall quarterly net profit down to $945 million.

Late last decade, big SUVs such as the Chevrolet Tahoe fell out of favor as consumers consistently saw prices above $3 at the gas pump and the U.S. economy struggled. But the economy is now growing, if somewhat unevenly, and gas has averaged about $2.30 per gallon so far this year. As a result, consumers bought nearly 55,000 big SUVs from GM, the best January-through-March total in seven years.

Pickup sales also rose as conditions improved for small businesses. GM sold more than 198,000 in the U.S., the best first quarter for the vehicles in eight years, according to Ward’s Automotive.

Those big vehicles bring in sizeable profits. For the quarter, the average price of a Tahoe rose 8 percent to more than $57,000, Kelley Blue Book said. Other truck-based SUVs saw similar or even larger increases. Analysts estimate that GM makes around $10,000 apiece on trucks such as the Chevrolet Silverado and Cadillac Escalade.

“With gas prices still near a seven-year low point, and with credit more affordable and available than ever, GM, like the rest of the industry, has seen a significant increase in sales of their most-profitable vehicles,” said Alec Gutierrez, Kelley Blue Book senior analyst.

Chuck Stevens, GM chief financial officer, said consumers’ decision to buy big was “clearly a favorable tail wind” that boosted GM’s bottom line by $500 million.

Still, GM’s latest pickup and SUV sales were nowhere near the peaks of the previous decade. Pickup sales were the best for a first quarter since 2007, when GM sold almost 243,000. Big truck-based SUV sales were the best since 2008, when they hit 107,000.

GM’s profit amounted to 56 cents per share, compared with only $125 million, or 6 cents per share a year ago. Last year’s quarter included a $1.3 billion charge for an embarrassing series of recalls — including one for a deadly ignition switch problem.

The company did take an after-tax charge of $100 million this year to add to its compensation fund for victims of crashes caused by the faulty switches. It also incurred a $400 million charge to cut operations in Russia. Without those items, GM would have made 86 cents per share, short of analysts’ estimates of 95 cents. Revenue for the quarter fell nearly 5 percent to $35.7 billion.

GM shares fell nearly 4 percent to $35.68 in midday trading Thursday. The stock is up about 4 percent so far this year.

The company has now set aside $550 million to pay victims of crashes caused by defective small-car ignition switches. So far, compensation expert Kenneth Feinberg has deemed 87 deaths eligible for compensation, as well as 157 injuries. GM says the top end of its estimate for the fund remains at $600 million.