General Motors (
) faced immense problems during the financial crisis which hammered
most of the U.S. automakers. With the help of the U.S. government,
the company managed to restructure its business and emerge as a
stronger company, even reporting a profit for the second half of
2010. The new GM commenced operations on July 10, 2009, after it
completed the acquisition of substantially all of the assets and
assumed certain liabilities of the old GM through a 363 Sale under
the Bankruptcy Code. GM is now focusing its resources upon four
core brands: Cadillac, GMC, Buick and Chevrolet and
competes with players like Toyota (
), Honda (
), Ford (
(ETR:DAI), Volkswagen (ETR:VOW) and Hyundai (SEO:005380).
We have a price estimate of $45
, which is about 40% ahead of the current market price.
February U.S. Auto Sales Grow with Incentives
In the latest February U.S. vehicle sales figures, auto industry
sales defied market concerns and grew by around 27%. This increase
was the largest since the U.S. government implemented the Car
Allowance Rebate System (CARS), also called the "cash for clunkers
program," which was a $3 billion U.S. federal program intended to
provide economic incentives to U.S. residents to purchase new, more
fuel-efficient vehicles. GM led this rally by posting a 46% rise in
sales from a year earlier.
Despite the recent increase in oil prices, truck and SUV sales
boomed. Trucks and SUVs are the most profitable products for U.S.
automobile companies. We believe the main drivers for this increase
is sales and improving consumer confidence were cheaper credit and
short term incentive programs.
GM Leading the Way… But For How Long?
GM has been using its lower cost base since its bankruptcy to
put pressure on other car competitors. GM led the auto market
with aggressive discounts in February that spurred its auto sales
as well. In February 2011, GM offered "loyalty" bonuses of $1,000
to current GM owners and payments to close out existing leases for
return buyers. But we expect that competitors can quickly catch up
with GM by offering their own discounts, which will dent GM's
competitive edge. Moreover, GM executives have already indicated
that they will start moderating their incentive costs starting in
Sustained Oil Prices Could Haunt U.S. Vehicle
GM's Chevrolet Silverado pickup truck gained market share
quickly in February 2011 and grew by 60%. However we believe that
political instability in the Middle East and Northern Africa,
including Libya, Bahrain and more recently Saudi Arabia and Iran,
could sustain oil prices at elevated levels. This outweighs the
risk of a drop in demand from the Japanese crisis in our view. This
will hurt truck and SUV sales and increase small cars and hybrid
sales, and because trucks are more profitable than cars, this could
hurt GM's operating profit margin.
However We Still See Plenty of Upside
Despite these concerns, we believe that total trucks and cars
sold in U.S. could grow by 1 percentage point faster than our
current expectations annually if GM sustains its current momentum.
This could allow the GM wholesale truck sales market share in the
U.S. and GM wholesale car sales market share in the U.S. to remain
stable at their 2010 levels instead of declining as we currently
project. Given the historical market share losses to foreign
competitors, this would be a major feat. Moreover, the number of
vehicles leased by GM could grow at a rate of 3 percentage points
faster than our current projections (chart not included) if GM
maintains its market share and given a recovery in the asset backed
market, which would improve its financing abilities.
This combined scenario would imply a $50 value, or 10% upside
from our current Trefis price of $45.37. You can modify the charts
above to make your own forecast.
See our full
estimates for GM