- GM North America constitutes 61% of the Trefis price estimate for General Motors's stock.
- Automobile Leases & Loans constitute 16% of the Trefis price estimate for General Motors's stock.
- GM China constitutes 16% of the Trefis price estimate for General Motors's stock.
WHAT HAS CHANGED?
- Impact of coronavirus outbreak
GM's stock has suffered as states and countries are on lockdown. As industries have halted production and services, the demand for automobiles has taken a hit with consumers focusing solely on essentials and not discretionary products. Further, the company has had to shut down its plants, which has led to further declines in its stock. Q2 saw a high drop in revenues and Net Income. Q3 saw comparatively better numbers.
- Latest Earnings
For Q3 2020, The company recorded revenue at $35.5 billion, flat compared to previous year. Net Income was recorded at $4 billion, up 74% y-o-y.
GM North America recorded $4.4 billion in EBIT(adjusted) for the quarter, while GM International and Cruise segments recorded EBIT(adjusted) of $0.0 billion and -$0.2 billion. GM financial recorded EBIT(adjusted) of $1.2 billion for the quarter. The earnings were recorded at $2.80, down from $1.62 compared to same period in the previous year.
- GM strike
Around 48,000 United Auto Workers members went on strike against GM on September 16, 2019, which lasted till October 25, 2019. The net strike impact to Q3 2019's GM North America EBIT(adjusted) was $-1 billion, including $0.3 billion of favorable timing items or $-0.52 per diluted share. The company expects the strike to impact approximately $-2 per diluted share for the year.
- Focus On Personal Mobility
GM is investing in technologies around electrification, autonomous vehicles, and mobility to adapt to the changing automotive landscape. The company continues to make progress in its vision of personal mobility and recently filed a safety report for the deployment of its fourth-generation Cruise AV. This is GM’s first production-ready driverless vehicle — a milestone towards its goal of deploying a driverless ride-sharing fleet in 2019. GM cruise (mobility division) is deeply resourced to succeed with more than 1,100 employees and $5 billion raised as external capital from Softbank and Honda in 2018.
- Growth In China
In China, GM expects the pricing pressures to continue. Still, a richer mix of vehicles – tilted towards crossovers and luxury models - is likely to drive growth in its equity income from the country. The company continued its aggressive product launches in China with more than 20 new and refresh models from the Buick, Chevrolet, Cadillac, Baojun, and Wuling brands. These included 7 SUVs and first of the all-new global family of vehicles.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
- GM's Equity Income From China:
General Motors is one of the few U.S.-based companies to crack the Chinese auto market. The automaker operates in China through joint ventures with local Chinese companies, and its income from the region is reported on an equity basis. 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.
GM is the third-largest automaker in the world in terms of the number of vehicles sold.
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 over 70 assembly facilities worldwide and has close to 90 additional global manufacturing facilities.
GM is now focusing its resources on 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 a 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.
SOURCES OF VALUE
China, where GM operates through joint ventures, is the most valuable division of the company. Its U.S. operations comes a close second.
China to be a significant 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. 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 significant source of growth in the future. GM's mix is more tilted towards Tier 1 and Tier 2 cities as of now, but the company plans to remedy the same.
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 primarily 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 its 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 $ 32,800 in 2016 to over $ 35,800 in 2025. 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 to expand its vehicle lease and loan 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. Combining these two trends means that it is likely that GM's lease division is going to generate strong revenue in the coming years. For FY 2018 and 2019, the company reported revenue growth for the segment with the effective interest rate contributing to the growth.
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. It is focusing on mobility initiatives and is working towards creating safer, better, and more sustainable vehicles in the future. General Motors is pursuing both hydrogen fuel cell technology and battery electric technology for its clean energy vehicles. The company will launch 20 new all-electric vehicles by 2023.
The company is moving fast on the self-driving vehicle's technology and has started testing these cars in San Francisco and will soon begin testing in New York.
Increased competition from regional and global automobile manufacturers in fast-growing emerging markets
As the size of the automobile market in developing 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 vehicles on a common architecture that is shared globally across 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.
Continued investment in a portfolio of technologies
GM is focusing on the following to address market needs:
- 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.
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.