2023-12-27 09:00:00 ET
Summary
- Despite our previous bullishness on Cruise, it is apparent that General Motors Company's decision to moderate the cash burn and preserve liquidity is highly prudent.
- Due to the demand headwind and its refusal to engage in Tesla's price war, it is unsurprising that GM has opted to moderate its EV production to "match demand."
- While GM's overall EBIT margins are likely to improve, we believe that EV adoption may stall until parity is achieved by sometime in 2026, with Tesla remaining the market leader.
- While the management has guided a "2024 budget that will fully offset UAW's incremental costs," it is uncertain how its capital intensity may be reduced and cost efficiency improved.
- Combined with the minimal projected expansion in its profitability through FY2025, GM may very well trade sideways at these levels moving forward, with its growth and dividend story unattractive here.
We previously covered General Motors Company (GM) in October 2023, discussing our bearish projections on the impact of the United Auto Workers ("UAW") contracts on its profitability, worsened by the temporal production losses from the ongoing strikes.
Combined with its impacted valuations and lower lows/ lower highs over the past few months, we had preferred to cautiously rate the stock as a Hold then.
In this article, we shall discuss why we are maintaining our Hold rating on the GM stock, attributed to the immense headwinds to its profitability, electric vehicle ("EV") transition, and autonomous dreams.
While long-term shareholders may applaud the aggressive buybacks and dividend raises, it is more likely than not that the stock may trade sideways at these levels over the next few years, with the recent recovery offering a minimal margin of safety.
The GM Investment Thesis Remains Murky Ahead
It appears that GM has not been able to catch a break, with the elevated interest rate environment bringing forth impacted EV demand, the Cruise debacle/ subsequent loss in key leadership, and the UAW strike likely to impact its next 5Y bottom lines.
1. It Remains To Be Seen If GM's FY2023 Performance May Be Replicated
GM has reported an excellent FQ3'23 earnings call, with automotive revenues of $40.49B ( -1.8% QoQ / +4.6% YoY ), adj EBIT of $3.56B (+10.21% QoQ/ -16.8% YoY), and adj automotive Free Cash Flow of $4.91B (-11.3% QoQ/ +6.9% YoY).
While the management has previously withdrawn their FY2023 guidance attributed to the uncertainty surrounding the UAW strike, it appears that things are not as bad as we have thought.
GM's final FY2023 adj EBIT guidance of $12.2B ( -15.8% YoY ) and adj EPS of $7.45 (-1.8% YoY) at the midpoint has only been moderately lowered by -6.1% and -2.6% compared to the previous outlook of $13B (-10.3% YoY) and $7.65 (+0.7% YoY), respectively, with the decline "primarily from lost production."
Unfortunately, investors must also note that while the legacy automaker may be able to replicate these numbers ahead, it may be mostly attributed to the reduced Cruise/ EV capex spending as a way to mitigate the impact of the UAW contract.
We shall discuss further.
2. GM's EV Segment Remains Unprofitable, Worsened By Macro Headwinds
It is apparent that GM has not been able to report profitable EV sales yet, with the management still targeting "low to mid- single-digit EBIT EV margin in 2025."
The elevated interest rates and the rising average interest rate for auto loans on new cars at 7.7% in November 2023 (+0.04 points MoM/ +1.65 YoY), compared to 2019 averages of 4.63%, have also naturally triggered affordability issues.
This is also why Tesla ( TSLA ) has continued its price cuts for new and used inventories, despite the notable impact on its profit margins , with GM also reporting a widening gap in its production-to-sales ratio in the latest quarter.
This is based on the latter's 32K EVs produced (+40% QoQ) and an +28% QoQ increase in its EV sales in FQ3'23, implying that part of its bloated inventories of $17.74B (-1% QoQ/ +8.3% YoY/ +70.7% from FY2019 levels) may also comprise unsold EVs.
As a result of the demand headwind and its refusal to engage in the price war, it is unsurprising that GM has opted to moderate its EV production to "match supply with demand."
This naturally results in its lowered FY2023 capital spending guidance of $11.25B at the midpoint, down from the previous guidance of $12B at the midpoint. This is on top of its aim to reduce fixed costs by approximately $20K per unit EV in 2024 and the pivot to higher margin models to accelerate its profitability.
While GM's overall EBIT margins are likely to improve in the near term, we believe that EV adoption is likely to stall until EV parity is achieved by sometime in 2026, with a similar sentiment shared by Ford ( F ) in the recent earnings call and TSLA likely to remain the market leader.
3. The Cruise Mishap Delays GM's Autonomous Progress
The Cruise mishap has unfortunately triggered pessimistic sentiments surrounding its autonomous capability , worsened by the departure of many key leaders and the subsequent layoffs .
With an accelerating quarterly loss of -$732M ( -19.8% QoQ / -47.2% YoY ), it is unsurprising that the segment has been consistently burning cash with deteriorating liquidity of $1.7B (-19% QoQ/ -46.8% YoY) in the latest quarter.
Despite our previous optimism, it is apparent that GM's choice to substantially moderate the " pace of Cruise expansion " in 2024 is highly prudent, with the management expected to offer " official guidance " in its upcoming Q4 earnings call in January 2024.
For now, with GM unlikely to further inject cash into the unprofitable Cruise segment, we believe that the term "good riddance" is somewhat applicable here, with it likely to partly offset the impact of the new UAW contract (to be further discussed in the next part).
However, readers need to temper their intermediate term expectations, since GM's autonomous prospects are likely discounted from henceforth, with it remaining to be seen when its Cruise robotaxi may achieve widespread adoption after the massive setback and regulatory scrutiny.
4. UAW Brings About $9.3B In Bottom Line Headwinds
We have previously projected a bottom line impact of up to -$938M annually, or the equivalent of -$0.67 in EPS from the UAW contract negotiation in our previous article.
It is apparent that the final numbers are worse than expected, with the new UAW contracts expected to bring about $9.3B in additional costs over the next five years, or the equivalent of $1.86B annually.
GM's number is even worse than F's current estimate of $8.8B of UAW expenses , or the equivalent of $1.76B annually.
Most importantly, while the GM management has guided "a 2024 budget that will fully offset the incremental costs of our new labor agreements," we are not convinced for now, with the inflation yet to normalize and the automaker unlikely to raise prices.
Combined with the reiterated 2025 target of 1M EV production capacity, it is uncertain how the management aims to reduce its capital intensity while improving its cost efficiency moving forward.
If any, the recent layoffs in various plants remain insignificant, against its 86K hourly employees and 81K salaried employees in FY2022, implying that GM requires drastic actions to fully offset the additional costs.
GM's Impacted Prospects Are Embedded In Its Valuations & Consensus Forward Estimates
GM Valuations
For now, GM's FWD P/E valuation of 4.83x and FWD Price/ Cash Flow valuation of 2.81 appear to be drastically corrected from its 1Y mean of 5.35x/ 3.11x, 3Y pre-pandemic mean of 6.22x/ 3.70x, and the sector median of 16.11x/ 10.22x, respectively.
It is apparent that GM faces the same headwinds as other legacy automakers as F, with the latter's valuations also impacted.
These are most attributed to the decelerating demand for first gen EVs, post-COVID inflationary pressures on their profit margins, and the impact of the UAW contracts over the next five years.
The Consensus Forward Estimates
The same has been estimated by the consensus, with GM expected to report impacted EBIT margins through FY2025, compared to its pre-pandemic averages of 7.9% and FY2022 levels of 9.2% (-2.1 points YoY).
Combined with the minimal expansion projected for its adj EPS at a CAGR of +0.4% through FY2025, we believe that GM may very well trade sideways at these levels moving forward, with its growth likely to be stunted in the intermediate term.
This is attributed to the stock already trading near our long-term price target of $37.10, based on the consensus FY2025 adj EPS estimates of $7.68 and its FWD P/E valuations of 4.83x.
So, Is GM Stock A Buy , Sell, or Hold?
GM 5Y Stock Price
For now, GM has already bounced by +29.9% since the November 2023 bottom, lifted by the optimistic sentiments surrounding the cooling inflation and the increased likelihood of a Fed pivot in Q1'24.
With the stock rapidly breaking out of its 50/ 100/ 200 day moving averages in one fell swoop, partly attributed to the recently announced shareholder-friendly policies , it appears that the optics surrounding the legacy automaker have moderately improved for now.
The $10B accelerated share repurchases are expected to retire an aggressive $6.8B worth of common shares, or the equivalent of 188.78M shares/ 8.6% of its float based on the stock prices at the time of writing, effectively bringing GM's overall share count to 1.189B (-235M YoY) by the upcoming earnings call.
Combined with the raised quarterly dividends by +33% to $0.12, we can understand why long-term shareholders have bullishly supported its recent stock recovery.
Does it mean that the GM stock is currently a Buy? Not quite.
GM's aggressive share repurchases imply that its balance sheet may be drained from the $15.28B of net cash (+33.3% QoQ/ +184.5% YoY) reported in the recent earnings call.
In addition, we maintain our belief that the legacy automaker does not offer a compelling growth story, with minimal top and bottom-line growth expected over the next few years.
While its Internal Combustion Engine ("ICE") segment remains profitable enough, GM does not offer a rich dividend yield as well, with its forward yields of 1.3% paling against the sector median of 2.14% and the current US Treasury Yields of between 3.87% and 5.35%.
Combined with the increased likelihood of a sideways trading pattern, we prefer to prudently continue rating General Motors Company stock as a Hold (Neutral) here, with the stock's inflated levels likely offering a minimal margin of safety.
For further details see:
General Motors: Good Riddance - Back To ICE Basics