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Investment Overview for General Motors (NYSE:GM)
GM is the third largest automaker in the world in terms of the number of vehicles sold, selling 9.96 million units in 2015.
GM commenced operations on July 10, 2009 after it completed the acquisition of substantially all the assets and certain liabilities of Old GM through a 363 Sale under the Bankruptcy Code. In the second half of 2010, the company achieved profitability.
GM seeks to distinguish its vehicles through superior design, quality, reliability, telematics (wireless voice and data), infotainment, and safety within their respective vehicle segments. Its business is diversified across products and geographic markets, with operations and sales in over 120 countries. GM assembles its passenger cars, crossover vehicles, light trucks, sport utility vehicles, vans, and other vehicles in 71 assembly facilities worldwide and has 88 additional global manufacturing facilities.
GM is now focusing its resources upon four core brands:
Cadillac has been a luxury auto brand since 1902. In recent years, Cadillac has witnessed a renaissance led by engineering and advanced technology.
GMC has built trucks since 1902, and is one of the industry's healthiest brands. Today GMC is evolving to offer more fuel-efficient trucks and crossovers, including the Terrain small SUV and Acadia crossover. GMC is the only manufacturer offering three full-size hybrid trucks.
Buick is a modern brand with premium vehicles. A new compact sedan and small crossover will join the portfolio in the next few years. Buick’s sales continue to increase in North America, and it remains a best-selling brand in China, with continuing record growth.
Chevrolet is a global automotive brand, with annual sales of about 4 million vehicles in more than 130 countries. In the U.S., the Chevrolet portfolio includes cars such as Corvette and Camaro; pickups and SUVs such as Silverado and Suburban; and passenger cars and crossovers such as Malibu, Equinox, and Traverse.
- GM's Equity Income From China:
General Motors is one of the few U.S. based companies ever to crack the Chinese auto market. The auto maker operates in China through joint ventures with local Chinese companies and its income from the region is reported in terms of its equity share in those companies. GM's sales in China have grown at a fast pace over the past few years and it has become the highest selling international brand in the region. GM has increased its production so much in the region that it can now afford to import vehicles from China to the U.S., if it wants to save on labor costs. However, the growth rate of the Chinese market is expected to slow down and most of its growth is expected to come from first time buyers in Tier 3 and Tier 4 cities. As a result, we forecast GM's equity income per unit sold to decline by 1% each year for the rest of our forecast period. If instead of declining by 1%, GM's equity income per unit sold rises at 5% for the rest of our forecast period, our target price for GM could increase by close to 10%. For a 10% downside, the equity income per unit sold would have to decline by 8% each year.
- Total Trucks Sold in the U.S.:
In recent years, sales of SUVs, Crossovers and Trucks have experienced a boom in the U.S. GM has ridden this wave to a year of record profitability in 2015. It gets close to 60% of its sales from the U.S. from trucks. As a result of its dominant position in this market, the company is expected to continue to capture significant value from the SUV/Trucks boom. We currently forecast the number of trucks sold in the U.S. to grow at a rate of 2% for the rest of our forecast period. However, if the market grows at 4% instead of 2%, our target price for GM could increase by 16%. If the market stays flat for the rest of our forecast period, i.e. is sales do not either grow or decline, our target price for GM could decline by more than 10%.
China, where GM operates through joint ventures, is the most valuable division of the company. This is closely followed by its U.S. operations.
China to be a major growth driver for GM
GM along with its joint venture partners in China sells the second most number of vehicles in the world's biggest car market. In addition to being the biggest car market, China is also the world's fastest growing car market and the growth in the future years is expected to come from a boom in the SUV segment in the country. This is a segment in which GM is investing heavily and if the company leverages the opportunities inherent in this market it can increase its equity per unit sold in China from close to $500 to $600, which would be a major source of growth in the future. However, in recent years, GM's sales mix in China has tilted towards lower margin Baojun SUVs, which has led to its equity income per unit sold to decline from $584 to $546. If the same trend continues, we forecast GM's equity income to decline to $504 by the end of our forecast period. However, if the company increases sales of Cadillac vehicles and takes a strong position in the burgeoning Chinese commercial vehicle market with its pick-up trucks GMC Sierra and Chevrolet Silverado, our forecasts could change significantly. The auto market in China is expected to contribute one in every three new car units sold in the world by 2020.
International vehicle market is 3.5x larger than the North American vehicle market:
2015 vehicle sales in North America are estimated at 21.5 million units. In comparison, there were approximately 3.5x as many vehicle sales (around 67 million) internationally. We estimate that GM will be able to maintain its global market share at approximately 11.2% and continue to grow in North America.
GM's U.S. Trucks Business Is Highly Profitable
GM's average transaction price in the U.S. is much higher than in any other geography. This is largely because of the high number of pick-up trucks it sells to both commercial and retail buyers. Moreover, GM is undertaking moves to modernize its truck lineup, changing their bodies from steel made to aluminum made, which should make them lighter, more fuel efficient and easier to handle. This could boost their transaction prices from $ 29,600 in 2016 to over $ 32,300 in 2023. As a result, the company's profitability from this segment could continue to rise and help drive its overall profits.
GM’s vehicle financing and lease business to grow
GM vehicle lease business had become very limited since 2008 when GM agreed to reduce its ownership in Ally Financial to less than 10%.
In October 2010, GM acquired AmeriCredit, an independent automobile finance company, for $3.5 billion, and renamed it as GM Financial. GM Financial aims to offer increased availability of leasing and sub-prime financing for its customers throughout economic cycles and expanding its vehicles lease and loans portfolio. GM is the highest selling car company in the U.S. and the second highest selling in China, the two biggest car markets in the world. Car purchasing through leases hit record highs in 2016. Combining these two trends means that it is likely that GM's lease division is going to generate strong revenue in the coming years.
GM has focused its resources in the U.S. on four key brands: Chevrolet, Cadillac, Buick, and GMC. As a result, GM completed the sale of Saab in February 2010 and the sale of Saab Automobile GB (Saab GB) in May 2010. It has ceased production of the Pontiac, Saturn, and HUMMER brands and continues the wind-down process of the related dealers.
Opel/Vauxhall restructuring in Europe
GM plans to continue to invest in capital, engineering and innovative fuel efficient powertrain technologies including an extended-range of electric vehicles and battery electric vehicles. The plans also include aggressive capacity reductions including headcount reductions. The restructuring plan will lower GM's vehicle manufacturing costs, through manufacturing rationalization, headcount reductions, labor cost concessions from the remaining workforce and selling, general and administrative efficiency initiatives.
Consumer preference for fuel-efficient cars
Continued consumer preference for lighter, more fuel-efficient cars, due to regulatory requirements and high fueling expenditure, might result in an unfavorable mix of sales that might drive down average car prices.
Increased competition from regional and global automobile manufacturers in fast growing emerging markets
As the size of the automobile market in emerging countries continues to increase, additional competitors, both international and domestic, will seek to enter these markets and existing market participants will act aggressively to increase their market share. Increased competition may result in price reductions, reduced margins, and GM’s inability to gain or hold market share.
In response, GM aims to pursue local and regional solutions to meet specific market requirements, while aiming to improve share in important markets, including South Korea, South Africa, Russia, India, and the ASEAN region.
Concentrated design and engineering resources on fewer brands and architectures
GM manufactures more than half of its overall vehicles on a common architecture, that is share globally across all its operations. This has resulted in lower investment per architecture and brand and will increase GM’s product development and manufacturing flexibility, thereby allowing it to maintain a steady schedule of important new product launches in the future.
Global architectures and consolidated product development activities will result in reduced material and engineering costs
Global architectures (that is, vehicle characteristics and dimensions supporting common sets of major vehicle underbody components and subsystems) allows GM to streamline its product development and manufacturing processes. GM has consolidated its product development activities under one global development leadership team with a centralized budget. This allows GM to design and engineer the vehicles globally while balancing cost efficient production locations and proximity to the end customer. This has resulted in reduced material and engineering costs.
Continued investment in a portfolio of technologies
GM is focusing on the following to address market needs:
GM’s continued investment in technologies that support energy diversity and energy efficiency, as well as in safety, telematics, and infotainment technology will drive higher vehicle sales.
- Continue to increase the fuel efficiency of its cars and trucks.
- Develop alternative fuel vehicles.
- Invest significantly in hybrid and electric technologies.
- Invest significantly in plug-in electric vehicle technology.
- Continue development of hydrogen fuel cell technology.
- OnStar in-vehicle safety, security, and communications service
- Development of personalized, on-demand car sharing services, like Maven.
- Partnering with ride-sharing service provider Lyft to develop a solid competitor to Uber.
- The addition of autonomous technology features to its vehicles.
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Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
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- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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