Why General Motors Should Cruise Through Covid-19 Headwinds

by Trefis Team
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We believe General Motors (NYSE: GM) is well-positioned to deal with a Covid recession. The automotive industry is rattled, and GM is no exception, with its stock tanking more than 30% since the beginning of the year. A Covid recession will impact the company’s revenues, cash flows, and ability to pay dividends. Fading consumer demand, reduced discretionary spending, and stay-at-home orders will result in minimal demand for automobiles. In Q2 2020, the company delivered 492K vehicles – a decline of about 34% compared to the figure a year ago. 

Trefis analyzes the potential impact of the Covid-19 recession on General Motors with a focus on the company’s liquidity reserves and concludes that GM has a steady financial position, and a Covid-19 recession will not have a major impact on the company’s cash reserves in the near term.

Impact On General Motors’ Revenues

  • If the outbreak of the virus increases, General Motors’ automobiles will see a low demand until the situation improves. As a result, General Motors’ revenues could decline by about 30% in 2020 on account of weaker demand, potential supply constraints, and a reduction in discretionary spending.
  • In addition to that, the company derives nearly 78% of its revenues from North America, which has become the epicenter of the outbreak, with US recording the largest numbers of Covid-19 cases across the globe.
  • Even with the slow reopening of the economy as lockdown is beginning to lift, social distancing measures may continue for months, which could impact people buying new cars.

Impact On General Motors Cash Flows

  • General Motors’ cash flows are likely to plunge in 2020 due to a steep fall in revenues and reduced profitability.  
  • The company will have to offer its products at a discount to keep the cash registers ringing, and to get rid of existing inventories. 
  • Elevated costs, coupled with lower revenues, will hurt the company’s bottom line. 
  • Despite these measures, we estimate that Free cash flow from operations (FCFO) will remain positive – although they will likely go down from $15 billion in 2019 to $2.5 billion in 2020. Taking into account expected capital expenditures of $3.8 billion for the year, FCFO-CapEx will be $-1.2 billion in 2020.

Cash Balance Impact

  • This will lead to a 2020 cash balance of $17.9 billion, which is lower than the figure at the end of 2019. 
  • This is with the assumption that the company will not pay dividends or repurchase shares. While that may be a disappointment for existing investors, these moves by the company will be essential for its long-term survival.

Conclusion

To sum things up, General Motors can weather a recession through mid-Q3 2020 and a 30% decline in revenues by cutting Capex, eliminating share repurchases, and suspending dividends. 

Our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

 

An alternative scenario for General Motors’ cash flows with a 50% decline in revenue instead is detailed as a part of our full analysis.

While General Motors seems to be in a relatively comfortable position to sail through the Covid crisis, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For more insights into the automobile space, you can see a comparative analysis of Daimler vs. Volkswagen.

 

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