GM General Motors Company

By Gautham Nagesh 

General Motors Co. posted its best financial quarter in the seven years since filing bankruptcy, but Brexit concerns have the Detroit auto giant raising a caution flag for the back half of 2016.

Bolstered by strong pickup truck and SUV production in North America, GM's operating profit widely outpaced analyst expectations in the second quarter. Net profit, which more than doubled to $2.9 billion, and revenue of $42.4 billion, up 11% versus the second quarter of 2015, represented two of the 19 quarterly postbankruptcy records the auto maker said it set in the three months ending June 30.

Even while earning $137 million in Europe during the second quarter, its first profitable period in the region since 2011, Chief Financial Officer Chuck Stevens signaled concern about the potential hit to earnings due to the U.K.'s decision to exit the European Unit. Citing a weakening British pound and softening of U.K demand, the company estimates $400 million in potential second-half impact due to Brexit, possibly knocking GM off its goal of reporting black ink in Europe on an annual basis for the first time since 1998.

"The Brexit vote has created a potentially significant headwind," Mr. Stevens said when discussing earnings Thursday, but reiterated the company still aims to meet its projection. "This is a speed bump along the way that we're going to deal with." Cost cuts and pricing changes could soften Brexit's blow, he said.

Missing the Europe profit target would be a rare misstep for Chief Executive Mary Barra, who took the helm in 2014 on the eve of the disclosure of a major vehicle-safety crisis. With that episode largely in the rearview mirror, Ms. Barra has consistently asked investors to judge her by results and not by lofty projections.

GM's global operating margin of 9.3% indicates the company is well on track to meet its longer term profit goals. GM shares traded up 1.7% in afternoon trading Thursday, exchanging hands at $32.02, or about a dollar shy of the company's 2010 initial public offering price.

Second-quarter results were benefited by $3.6 billion in operating profit in North America on GM's sharp increase in high-margin truck and sport-utility production, a move aimed at stocking dealer lots ahead of the summer selling season. GM books revenue and profits at the point of production, a strategy that allowed the company to offset concerns about the sizable amount of market share it lost in the period compared with the same quarter in 2015.

GM's North American earnings represented 90% of global operating profit for the quarter, and the region's 12.1% operating margin was a key factor driving global results and a 25-cents-per-share increase in its 2016 earnings estimate. Continued growth in China -- GM's largest market -- also boosted optimism.

Fearing a peak in U.S. light-vehicle demand, however, Ms. Barra has aggressively retooled for the future. The early months of 2016 included significant investment announcements, including a $500 million stake in ride-sharing firm Lyft Inc. Ms. Barra declined to say whether GM will participate in additional funding rounds, but said the "alliance" has met expectations this far.

The company on Thursday said in a regulatory filing its deal to purchase Silicon Valley autonomous-car developer, Cruise Automation Inc., was valued at nearly $700 million when it closed in May. That sum includes certain retention bonuses for certain Cruise employees, but doesn't reflect other undisclosed performance awards tied to technology and commercialization milestones.

Speaking to analysts, Ms. Barra said GM was drawn to Cruise by its expertise in machine learning and artificial intelligence, two areas considered crucial to the development of fully autonomous vehicles. GM engineers, including those acquired in the Cruise deal, are testing autonomous Chevrolet Bolt electric cars in San Francisco.

Edward Jones senior equity analyst Jeff Windau said GM's management team is executing "very well" amid favorable market conditions. Low fuel prices have ratcheted up demand for the heavier and pricier light trucks that represent Detroit's sweet spot, and low industry inventories have limited the need for incentives.

Mr. Windau, however, said softening demand in the U.S. could impact GM's ability to maintain its discipline on pricing. Weakness in South America and uncertainty in Europe -- fueled partially by Brexit -- presents risks.

GM also said in a regulatory filing it could be forced to eventually recall an additional 4.3 million vehicles equipped with Takata Corp. air bags, leading to costs totaling $550 million. The components are part of a wider industry recall of tens of millions of Takata air bags that run the risk of rupturing and spraying shrapnel.

--Mike Spector and John D. Stoll contributed to this article

Write to Gautham Nagesh at gautham.nagesh@wsj.com

(END) Dow Jones Newswires

July 21, 2016 15:56 ET (19:56 GMT)

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