General Motors: Strikes Consequences And Business Prospects Explained (NYSE:GM)

investment thesis

General Motors Company (New York Stock Exchange:GM) Automotive sales continue to be promising for the company, with a strong recovery in U.S. sales offsetting the slow recovery of sales to pre-COVID-19 levels in other parts of the world. Additionally, GM continues to The company has an EV business and is working on plans to capture this market by launching new models in various car categories, including several new models with 5 percent higher gross margins than alternative models. There are plans to release an SUV. General Motors claims it sees no slowdown in demand across its current EV portfolio and is ramping up production to develop in a more sustainable manner, pushing EV sales margins into the low to mid-single digits. We believe that now is the best time to increase it step by step. By 2025. The rating is “buy”.

We’ve covered this stock before, but a few things have changed since last quarter. The company has been facing a prolonged strike that resulted in the reversal of previous guidance, the holding of Fed interest rates, and reductions in cruise ship operations. In this article, we’ll take a deep dive into how the strike will affect GM’s total costs and what’s happening to car and EV production.

The main impetus for the stock price rise in recent days was GM’s announcement of accelerating share buybacks of $10 billion (approximately 20% of the company’s capital) and an over 30% increase in next year’s dividend, demonstrating confidence in the company’s strategy. I have reconfirmed this. The latest share buyback is significantly larger than GM’s previous share buybacks, and far exceeds other share buybacks by major U.S. companies as a percentage of market capitalization.

Automotive market situation

The U.S. economy remains strong despite high Federal Reserve interest rates. The labor market is stable; unemployment Historically, consumption is low, but consumption is increasing. Spending with the over-recognized savings U.S. household ownership rates support U.S. automobile demand.

From 2014 to 2020, typical U.S. vehicle demand was approximately 17 million vehicles. Approximately 15 million cars were sold in 2021. As of the end of the third quarter of 2023, demand was down by an average of 100,000 units to a total of 16.2 million units, compared to approximately 700,000 units in the first quarter of 2023, thanks to consumers’ financial health. increased.

Based on our calculations, current annual car demand in the United States is unmet, ranging from 500,000 to 1 million cars.

Amid the huge imbalance between supply and demand, the US new car price index continues to hit new highs.

The situation is similar in the US used car market, but price growth has slowed considerably.

The situation in the new car market is different from that of used cars. While automakers work to restore production, new players are emerging in the used car market. As utility bills, loans, and mortgage rates rise while real income falls, individuals begin selling their cars.

At the same time, new car makers like GM are making progress on the supply chain and semiconductor situation. But with new cars still in such short supply on the market, automakers continue to pass costs on to consumers, albeit at a slower pace. GM’s dollar margin per vehicle will reach $4,750 in Q3 2023, compared to $4,700 in Q2 2023, $5,200 in Q3 2022, and the historical average level of $2,500. did.

Workers’ strikes and their impact on GM’s performance

The workers’ strike at GM plants (as well as Ford and Stellantis plants) began more than two months ago and only recently reached its logical conclusion.

“This proposal is the most significant that GM has ever intended for the UAW,” General Motors executives said during a third-quarter 2023 earnings conference call. will earn $40.39 an hour, or about $84,000 a year.” The salary by the end of this agreement also includes reinstatement living expenses, a 25% increase in his company’s 401(k) contributions, and world-class medical care with no out-of-pocket premiums or deductibles for senior members. Masu. We also offer plenty of paid vacation and other benefits. ” One of GM’s key conditions in negotiating the terms of the contract was to avoid jeopardizing the future of the company and the employment of GM team members.

The stand-up strike, which lasted nearly two months, had an approximately $200 million impact on third-quarter earnings before interest and taxes, and the company estimated the fourth-quarter impact to be at least $600 million. The company initially did not provide new guidance on other 2023 operating metrics and withdrew its full-year 2023 outlook, but said strong operating fundamentals had pushed GM into the lower half of its range before the impact of the strike. Ta. However, after the company ratifies the deal, management will not only provide an update to investors, but also increase common stock dividends by 33% and conduct $10 billion in share buybacks starting in January 2024. He also announced his intentions.

When adjusting the model, we assume wage increases of 10-15% over the next 12 months and around 6% over the following years. Given the car shortage, automakers will only be able to pass on 10% of this wage increase to prices. Furthermore, as the rate of increase in prices is gradual, it only compensates for the end of the rise in wages. Wages account for about 40% of his GM’s production costs. The UAW counts about 46,000 of his GM employees as members, about 27% of the workforce.

Therefore, with the ratification of the UAW Agreement, total costs are expected to rise from approximately 89% of revenues to approximately 90.2% in 2024 and reach an average of approximately 89% by 2025.

Automobile and EV production

GM sold approximately 981,000 vehicles, falling short of our forecast of 993,000 vehicles. This difference was due to lower than expected operating profit due to strikes and temporary production stoppages. GM’s inventory declined sequentially from $17.9 billion to $17.7 billion due to both lower production and consumer financial health. Average vehicle price was $41,300 (+3% YoY, -2% QoQ).

We maintain our 2023 car sales forecast at 3.84 million units (up 7.3% year-on-year) and our 2024 sales forecast from 4 million units (up 4.6% year-on-year) to 4.1 million units (up 6.2% year-on-year). ). This was due to a strong recovery in U.S. sales, offsetting a slow recovery to pre-COVID-19 levels in other parts of the world, including higher penetration of electric vehicles in sales in Asia. .

General Motors commented on new SUV models, a market the company is focusing on. held It is expected to capture approximately 14% market share in the U.S. in Q3 2023 with top models such as the Chevrolet Equinox, Chevrolet Traverse, and Chevrolet Trailblazer. Although the company regularly upgrades its production technology to improve sales margins, rising labor costs will increase the need to focus on its best-selling vehicles to increase profit margins. GM plans to launch several new SUVs with gross margins that are 5 percentage points higher than the models they replace. His first two all-new products are the Chevrolet Trax and Buick Envista. The new Chevrolet Traverse, GMC Acadia, and Buick Enclave will be launched in the first half of 2024, followed by the next-generation ICE Chevrolet Equinox and GMC Terrain, with production expected to begin in mid-2024. be. That year.

As for the other markets in which GM operates, the company has shown solid sales momentum since the beginning of the year, with positive profits in all regions in the third quarter of 2023. noticed. However, despite a 5% quarter-over-quarter increase in sales in Asia and an 11% quarter-over-quarter increase in South America, GM lost an average of 30 basis points of market share outside of North America. GM’s sales in the Asian market remain well below the pre-coronavirus quarterly average of 250,000 units. At the same time, the share of EV sales in Asia has expanded to 20-25% of total car sales.

When it comes to electric vehicles, General Motors continues to work on its transition to EVs. The company said it will begin selling more electric vehicles in the third quarter of 2023 than in the previous quarter and is not seeing any slowdown in demand across its current portfolio. Therefore, the company says now is the right time to scale up production to develop in a more sustainable manner and gradually increase EV sales margins to low to mid-single digits by 2025. thinking.

One of the key factors that determines production costs is the battery. GM is paying special attention to battery production and has stakes in several joint ventures that manufacture batteries, including the aforementioned Ultium Cells plant in Ohio. Over the past 12 months, the company has managed to reduce the cost of manufacturing one battery cell in its factories by 45% due to scale effects. The release schedule for the Chevrolet Equinox EV, Silverado EV RST, and GMC Sierra EV Denali will be delayed by several months as the new software development team asked for more time.

General Motors’ EV sales forecast for 2023 is expected to increase from 70,500 units (127% increase from the previous year) to 77,200 units (149% increase from the previous year) to 94,800 units (34% increase from the previous year). GM plans to continue expanding EV production and at the same time increase manufacturing efficiency by reducing EV production costs, so it is expected to reach 112.8 thousand units (46% increase from the previous year) in 2024.

As for Cruise’s robotaxis, the company is facing restrictions from regulators over hit-and-run incidents involving Cruise AVs. Cruise Chief Administrative Officer Craig Glidden said the company is focused on rebuilding trust with regulators, although he acknowledged it will take time. GM CEO Mary Barra said Cruise’s external safety review will continue through the first quarter of 2024. California Public Utilities Commission (CPUC) ordered Cruz was arraigned at a Feb. 6 hearing on charges of “misleading the Commission by omission regarding the scope and severity of the accident” and “making misleading public comments regarding communications with the Commission.” He is scheduled to appear in court. The stock price has already absorbed the negative factors and the company has embarked on a major restructuring of the division, which it hopes will lead to a recovery and expansion of Cruise’s business.

GM’s financial results

GM’s 2023 revenue forecast is $173.8 billion (up 11% year-on-year) to $174 billion (up 11% year-on-year), and from $185.7 billion (up 7% year-on-year) to $188.1 billion (up 11% year-on-year). 11%). 2024 will be 8% compared to the previous year due to the following reasons)

• The projected average selling price for a car in 2023 increases from $41.6k to $41.7k, and the projected average selling price for 2024 is unchanged at $42.5k.
• The forecast for car sales in 2023 remains unchanged at 3.84 million units (7.3% increase from the previous year), and the forecast for 2024 increases from 4 million units (4.6% increase from the previous year) to 4.1 million units (6.2% increase). /Year).

We raise our 2023 EBITDA forecast from $22.0 billion (up 2% year-on-year) to $22.4 billion (up 4% year-over-year), while increasing our 2024 EBITDA forecast to $22.7 billion (up 3% year-over-year). ) to $22.1 billion. 1 billion yen (-1 year-on-year %) then reach an average of about 89% by 2025.

evaluation

We are raising our price target from $51 to $53 for the following reasons:

• EBITDA growth forecast for 2023.
• Reduced net debt from $90 billion to $88 billion.
• Changes in FTM evaluation period.

Based on the new assumptions, we assign a Buy rating to the stock. The increase is +58%.

conclusion

General Motors continues to develop its EV business and is working on plans to capture the market by releasing new models in various car segments. Despite the crisis, GM will continue to invest heavily in EVs, both by opening new factories and developing a new product lineup.

We believe the company has strong fundamentals and is currently trading well below its fair value.