2023-10-19 09:00:00 ET
Summary
- Depending on the eventual agreement with UAW, we may see GM's profitability impacted by an estimated sum of up to -$938M annually, or the equivalent of -$0.67 in EPS.
- This is on top of the projected weekly production losses of up to -$770M, or the equivalent of -$3.85B by October 20, 2023.
- The profitability headwind may also affect GM's ability to sustain its dividend payouts and share repurchases, with Q4 sales and deliveries likely to be underwhelming.
- As a result, it is unsurprising that the stock has also breached its critical support levels of $30s, with the upcoming FQ3'23 earnings call likely to bring forth sobering forward commentary.
- Interested investors may want to stand by the sidelines and observe the stock's movement for a little longer, before adding to their positions once a sustainable bottom has been found.
We previously covered General Motors (GM) in August 2023, discussing Mr. Market's pessimism on its prospects, despite the management's FY2025 revenue target of $225B and successful robo-taxi segment.
A recovery in the stock's price had yet to materialize as well, as it continued to trade sideways despite the automaker's efforts to maintain its profit margins. As a result of the potential underperformance, we had iterated an accumulation point at its previous support levels of $32 for an improved margin of safety.
In this article, we will be discussing GM's uncertain near-term prospects, as the UAW strike continues with no resolution in sight.
We believe the automaker's profitability may be drastically impacted, attributed to the additional costs associated with the strike and raised wages, potentially affecting its ability to sustain its dividend payouts and share repurchases.
We will discuss further.
The GM Investment Thesis Has Deteriorated, Thanks To The UAW Headwinds
GM Valuations
For now, GM's FWD P/E valuation has plummeted to 3.90x thanks to the UAW strike, lower compared to its hyper-pandemic P/E mean of 9.79x and pre-pandemic mean of 6.04x. These numbers are not overly pessimistic as well, since we may see a large impact on its profitability moving forward.
For example, the automaker's new labor contract in Canada has suggested an immense headwind, based on the projected pay raise of between 20% and 25% for its production workers/ skilled trades over the next three years.
These numbers are similar to Ford's (F) current commitment of approximately +21.7% in pay raises for 57K UAW-Ford workers moving forward, with an estimated impact of up to -$969M annually. Interested investors may refer to my previous F article here .
For now, GM reports an annualized FQ2'23 automotive and other selling, general, and administrative expense of $10.2B ( inline QoQ / +11.3% YoY), notably higher than the FY2019 levels of $8.49B (-12% YoY).
Depending on the eventual agreement with UAW, we expect to see this sum drastically increase, potentially to an annualized sum of $10.83B (+6.1%), or up to $11.13B (+9.1%):
- Based on a similar calculation as that for F, with GM's 46K UAW workers and a raised annual wages by +20% from $68.3K to $82K, we are looking at an estimated profitability impact of up to -$630M annually, or the equivalent of -$0.46 in EPS.
- If GM is to acquiesce to UAW's demand of at least +30% increase in wages to $88.7K instead, we may see an estimated profitability impact of up to -$938M annually, or the equivalent of -$0.67 in EPS.
Estimated Weekly Effect Of A Union Strike
CNBC, BofA Securities
With the UAW strike already ongoing for over 32 days since September 15, 2023, it remains to be seen when we may see a resolution. The impact on GM's FQ4'23 performance may be already be painful, with market analysts projecting a weekly loss of up to -$770M, or the equivalent of -$3.85B by October 20, 2023.
Even then, investors may want to brace for more impact, since the 2023 strike may be worse than the previous 2019 strike, which went on for as long as forty days, resulting in idled plants with 300K vehicles in production losses and $3.6B in lost earnings .
These headwinds may result in GM's reduced capital spending, as F did in pausing the ongoing construction of its Michigan battery plant in collaboration with CATL, further delaying their overall electrification progress.
The dual-pronged profitability headwind from the UAW strike and raised wages may also impact the automaker's ability in sustaining its dividend payouts and share repurchases, depending on the eventual contracted wages.
For reference, the GM management executed $627M in dividends (+262.4% sequentially) and $3.36B in share repurchases (nil) over the last twelve months.
As a result of the potential headwinds, investors may want to temper their near term expectations for now.
FQ4'23 Deliveries May Underwhelm, Depending On When UAW Strike Is Resolved
GM has had to pause production of its pickup trucks due to a supply chain issue in August 2023, with things likely to be further affected by the ongoing UAW strike.
For now, things appear to be alright on the surface, with the automaker reporting 674.33K units sold ( -2.5% QoQ / +21.3% YoY ) in the US by FQ3'23.
Most importantly, GM reported flat incentives and ATPs, implying a robust consumer demand despite the elevated borrowing costs of 7.51% by September 2023 (+0.11 points MoM/ +2.35 points YoY/ +2.88 points from FY2019 averages of 4.63%).
However, with the UAW strike still ongoing, we believe the automaker's productions and sales may be sorely impacted in FQ4'23, naturally affecting its top and bottom lines at the same time.
We also believe that part of the FQ3'23 US inventories of 442.58K units (+3.2% QoQ/ +23.1% YoY) may also be unfinished, attributed to the automaker's ongoing battery issues, on top the parts and labor shortage from the UAW strike.
As a result of its production and sales headwind in FQ4'23, things may get worse for GM before they get better.
So, Is GM Stock A Buy , Sell, or Hold?
GM 5Y Stock Price
As a result of the pessimistic factors above, it is unsurprising that the GM stock has also breached its critical support levels of $30s, with the upcoming FQ3'23 earnings call likely to bring forth sobering forward commentary and lowered top/ bottom line guidance.
With more uncertainty ahead, we believe that the stock may further slide in the near term, until a resolution has been found.
While GM may boast a more than sufficient net cash position of $11.46B in the latest quarter (+94.5% QoQ/ +186.5% YoY), implying its sufficient liquidity, we prefer to cautiously rate the stock as a Hold here.
Interested investors may want to stand by the sidelines and observe the stock's movement for a little longer, before adding to their positions once a sustainable bottom has been found.
For further details see:
General Motors: How Cheap Is Cheap Enough?