GM Market Share Recovery Supports $45 Value

By
A A A

General Motors ( GM ) 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 ( TM ), Honda ( HMC ), Ford ( F ), Daimler (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 March.

Sustained Oil Prices Could Haunt U.S. Vehicle Sales

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 .



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: F , GM , HMC , TM

Trefis

Trefis

More from Trefis:

Related Videos

Stocks

Referenced

83%
58%
67%
69%

Most Active by Volume

112,131,130
  • $74.98 ▲ 5.18%
57,963,905
  • $8.32 ▲ 8.33%
48,392,602
  • $3.45 ▼ 0.29%
45,276,527
  • $36.17 ▲ 4.21%
44,800,927
  • $17.84 ▲ 0.34%
44,539,649
  • $97.03 ▼ 0.16%
44,078,180
  • $15.62 ▲ 0.64%
43,461,551
  • $35.50 ▼ 1.06%
As of 7/24/2014, 04:04 PM