2018 was a difficult year for automakers. Excluding electric automaker Tesla (TSLA - Free Report) , the average share price for companies in the automotive industry was down more than 20%. Many of the issues that have plagued auto stocks in the recent past are now being resolved and there are now definitely reasons to give the industry another look.
General Motors (GM - Free Report) , finished last year more than 25% off of its 52-week highs. The December 31st closing price of $33.45/share was essentially the same as the $33/share November 2010 IPO price as the modern GM began trading publicly once again after bankruptcy and a US government sponsored bailout.
In November, GM announced a major restructuring plan that included idling five factories, widespread layoffs and a redesign of its product lines, with more trucks, SUVs and crossover vehicles and almost no traditional sedans - which have fallen out of favor with consumers. The moves are expected to add more than $6B in free cash flow by 2020.
Though the move initially drew the ire of the Trump administration – which has made preserving US manufacturing jobs a key priority – it’s clear that CEO Mary Barra has both the insight to think towards the future and the guts to make difficult or unpopular decisions that are in the long-term best interests of shareholders.
In addition to the restructuring, external events seem to finally be lining up in GM’s favor as well.
Oil prices are near multi-year lows thanks to a global supply surplus and lagging demand. The large trucks and SUVs that sell the best when gasoline prices are low are also the most expensive and highest margin vehicles for GM.
Trade negotiations between the US and China seem to be improving lately. On Monday, an American delegation of midlevel trade officials began two days of talks with their counterparts in China, and early reports about progress have been encouraging. If the talks are successful, Chinese representatives are expected to travel to Washington within a few weeks to meet with Treasury Secretary Steve Mnuchin and Robert Lighthizer, the US Trade Representative. The Trump administration believes strongly that the relative strength of economic conditions in the US - especially in comparison to weakness in China - gives them considerable leverage in negotiations to end the trade war.
The trade war has been difficult for GM for several reasons. Tariffs on steel and aluminum made raw materials more expensive, Chinese Tariffs on imported vehicles made American cars more expensive for Chinese consumers to purchase and the negative impact of the trade war on the Chinese economy has made consumers less able to afford new purchases.
Any progress toward resolution would be a big shot in the arm for GM.
In the fast-evolving industries of ride-sharing and autonomous driving, GM might have a leg up on both Uber and Lyft with it’s Cruise Autonomous division, which it acquired in 2016 and has been developing ever since. GM has been testing electric Bolt vehicles with driverless capability in cities around the US and has plans to deploy a fleet of thousands of driverless ride-share cars at some point in the future.
Eventually, the Cruise division could possibly be spun off as a separate company, sold or kept as its own GM division, but any of those outcomes would be a win for GM investors.
Earnings Estimates Rising
GM was able to deliver a big earnings beat in the most recent quarter, netting $ 1.87/share, almost 50% higher than the Zacks Consensus Estimate of $1.26/share. When the company reports full-year 2018 results on February 5th, analysts expect to see net earnings of $6.27/share, well above recent estimates of $5.96/share.
GM is currently a Zacks Rank #1 (Strong Buy).
We won’t have to wait until February for our next look at the future of GM, however. The company is scheduled to issue an investor update this Friday January 11th and also to announce its future plans at the Detroit Auto Show next week.
Though it’s been a difficult stretch for US automakers lately, GM looks well positioned to thrive going forward.
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