STLA - General Motors: A Significant Loss Of Confidence Means It's Time To Sell

2023-10-27 12:35:37 ET

Summary

• General Motors stock has significantly underperformed the S&P 500 and its legacy auto peers. GM investors cannot attribute it solely to the UAW labor strike.
• The market's adverse reaction suggests significant concerns about GM's EV execution relative to its peers. Its robotaxi business has also taken a massive hit with the recent suspension.
• Investors are right to question whether General Motors's 2030 business plan is still on track, notwithstanding management's optimism.
• GM has moved firmly into a medium-term downtrend, with buyers giving up the critical $30 support zone decisively.
• I explain why it's time to exit if you still have exposure in GM.

I last covered General Motors Company ( GM ) stock in late January , as I upgraded my thesis (Buy rating) and noted that sufficient pessimism had been priced in. While there was an initial surge in GM toward its February highs, buyers were not convinced enough to hold onto their gains.

As such, GM has underperformed the S&P 500 ( S P500 ) significantly since then. In addition, GM also performed well below its legacy auto peers, as seen above. Notably, GM delivered a 1Y total return of -25% compared to Ford ( F ) stock's -2.7% and Stellantis ( STLA ) stock's 48% gain. As such, I believe attributing General Motors' malaise solely to the UAW labor strike isn't justified.

It's challenging to identify a significant factor in GM's battering as it undergoes its EV transformation. The company posted a solid third-quarter or FQ3 earnings release , underscoring the performance of its ICE legacy business. Accordingly, General Motors posted an adjusted EBIT of $3.56B, corroborating its best-in-class "A+" profitability grade. Although it decided to withdraw its FY23 full-year guidance, given the current UAW strike dynamics, it shouldn't have surprised investors.

As such, I assessed that the market's adverse reaction suggests that investors are more concerned with the company's EV execution relative to its peers. With macroeconomic uncertainties worsening due to the surge in long-term bond yields, the near-term underlying EV demand could be further impacted. Tesla's ( TSLA ) recent earnings release indicated how challenging it has turned even for the leading EV makers, as its operating margin fell to 7.6%. Furthermore, Tesla didn't lift its full-year guidance, suggesting it has been sacrificing near-term profitability to cope with the near-term slowdown.

General Motors fed to the worries about a worsening near-term impact as management pulled its near-term EV production target. Accordingly, the company has put aside its cumulative 400K EV production target from 2022 to H1'24, as it also " retimed at least $1.5B of capital spending at its Orion plant."

Although management maintained its 1M annualized EV capacity commitment by the end of 2025, investors are right to ask whether its transformation remains on track. Also, questions will need to be asked about whether its FY25 adjusted EBIT margin target of low-to-mid single-digit can be achieved.

While the company has committed to executing its $2B in fixed cost reduction, the uncertainties over the UAW strikes could hurt its program further. As such, I believe GM investors could feel more relieved, as General Motors is reportedly close to a deal with the UAW.

Notwithstanding the potentially good news, an analyst on GM's earnings call correctly pointed out that the market "doesn't seem to give any credit to the Cruise business and may even imply a negative value for it." It's interesting because General Motors ascribed a $50B revenue target by 2030 for its autonomous robotaxi segment.

However, despite the significant investments poured into the business, investors' optimism has likely been affected by the spate of accidents involving Cruise. Moreover, the recent suspension by California state regulators in response to an accident involving a Cruise vehicle has put further pressure on General Motors to justify whether its long-term forecasts will pan out, considering the significant investments (potentially leading to a negative value?). Cruise has also suspended its robotaxi fleet, given the recent uproar over the safety of its vehicles, dealing a further blow to the company.

The sellers have spoken, as GM fell below the critical support level of $30 (underpinned since July 2022). It was a dramatic loss of faith for Mary Barra and her team as buyers fled.

Furthermore, GM's significant underperformance relative to its legacy peers suggests management cannot attribute it to an industry-wide crisis. I believe investors might increasingly see more holes in General Motors' 2030 business plan, suggesting they must account for much higher execution risks.

With GM looking at a potential re-test of its $23 support level and firmly in a medium-term downtrend, it's time for investors to call it a day and move on.

Rating: Downgraded to Sell

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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