Why GM Must Keep Its Operating Expenses In Check
General Motors (NASDAQ: GM) has increased its unit sales from 9.76 million in 2013 to 9.96 million in 2015. Over the same period, its revenue declined from $151.9 billion to $146.4 billion, implying a close to 6% reduction in revenue per unit sold to around $14,700. Luckily for the company, it also reduced its cost of sales and inventory,per unit by just under 7% to around $12,900. However, over the same period, its expenditure on selling, general and administrative operations increased by close to 6%, rising from around $1,270 per unit to $1,350 per unit. This is is extremely important to note as GM’s stock price is highly sensitive to its SG&A per unit. Below, we draw out three scenarios which highlight this fact.
To arrive at our stock price we assumed that GM’s SG&A per unit would decline at around 5% for the rest of our forecast period. However, if the decline rate is 10%, there could be as much as an 84% upside to our valuation. In contrast, if SG&A per unit remains flat, there could be a 76% downside to our valuation of GM.
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for General Motors
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