How Can Chinese Economy Slowdown And Trade Wars Affect General Motors’ Valuation?
General Motors (NYSE: GM) reported its 4th quarter and full year results for Fiscal year 2018 recently. The company delivered good results on the back of higher pricing for the fiscal year. The company beat consensus expectations and reported a revenue of $147 billion and adjusted diluted EPS of $6.54 for the fiscal year 2018. The company also maintained a healthy interest margin of about 8%.
We have a price estimate of $42 per share for the company. In our interactive dashboard If GM’s China Sale Volume goes down 25%?, we provide a scenario in which we consider what if GM’s China Volume falls by 25% in FY 2019, how will it affect GM’s share price? In addition, here is more Consumer Discretionary data.
China has been the company’s focus for some time now, General Motors is quite confident about a long-term benefit from China. But there are a lot of macro-economic issues in China. The Chinese economy is facing a slowdown affecting Car sales, which have fallen for the first time since last summer. In 2018 the economy grew at 6.6%, the slowest pace since 1990. This is causing investor concern and thus reduction in foreign investments. The trade frictions and tougher policies are also not helping the growth. The trade war has been on for about a year now and there’s not much clarity on the resolution yet. So we decided to take a pessimistic scenario of these macroeconomic issues and see how it will affect General Motors’ Valuation.
In this scenario we will ascertain the effect on GM’s Gross Profit and valuation if China volume falls by 25% in Fiscal Year 2019 due the trade war between the US and China, and slowing of the Chinese economy. Consequently, the company would sell 2.73 million cars against 3.65 million last year in China. This would lead to a loss of revenue and gross profit of $600 million. But the Price estimate falls by only $0.80 (1.8%) i.e. from $42.40 to $41.60. This shows a lack of dependency of GM in the China market, but it also shows that GM has a lot of potential to grow in what will be the world’s biggest automotive market in the coming years.
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