After GM’s stock surged over 35% in the past two months, Goldman finally decided they had seen enough this morning and downgraded the stock to sell with a $32 price target.
So what caused the downgrade? Well, Goldman figures GM is facing just a few ‘minor’ headwinds over the next couple of years which include collapsing industry volumes and declining margins on crossover products which should result in a ~22% decline in EBIT next year…oh, and the fact that the company suddenly trades at an historically high multiple, just as earnings are about to collapse, was also viewed negatively by Goldman’s auto team. Here’s the summary of their downgrade:
“Looking ahead into 2018 and given the current valuation level, we see a downward infection in GM earnings and consequently downgrade shares to Sell. We expect that a normalization in SAAR coupled with the company’s product launches in 2018 will weigh on GMNA pro?tability. Our work on pickup trucks and crossovers suggest that GM likely experiences volume and mix headwinds that exacerbate the cyclical pro?t headwinds. Combined, we see this driving 2018E EBIT -adjusted down by 22% yoy and compressing overall corporate margins. We see 28% downside to our 12-month price target of $32.”
On overall industry volume, Goldman sees a 15% decline in U.S. SAAR over the next couple of years to 15mm which they think will be prompted by, among other things, “challenging consumer affordability” which will result from rising interest rates and a tightening of auto credit.
US cycle peaked, and production cuts likely continue: We believe cleared through pent-up demand (given sales above normalized levels since 2013) and challenged consumer affordability (rising interest rates, tightening auto credit) will drive a normalization in US SAAR beginning in 2018, ultimately translating into declines in utility vehicles and passenger cars. As GM generates 106% of Automotive pro?t and 108% of FCF in North America, we expect this cycle normalization to pressure GMNA results going forward.
Meanwhile, Goldman sees GM share loss on pickup trucks in 2018 and declining pricing power on crossovers due to a flood of competitive models in that segment.
Pickup truck changeover leaves GM vulnerable to share loss in 2018: Historically,n pickup truck refreshes drive market share losses of 100bps to 300bps in the year during the launch. As GM approaches a 2018 changeover with incremental downtime and given Ford’s recently refreshed F-Series, we expect share shifts to pressure GM. We see a $2bn headwind in volume/mix at GM related to its 2018 pickup refresh.
Growing competition in crossover utility vehicles (CUVs) should weigh onn pricing: As the industry has bene?tted from a mix shift to higher variable pro?t crossovers (from passenger cars), OEMs have shifted their product strategy and 40% of vehicles launching over the next few years are CUVs. As a result, competition in the segment has been intensifying and GM’s CUV pro?tability has begun to compress; we believe this trend likely continues particularly as overall sales slow. As CUVs represent 27% of GM’s portfolio (vs. 22% at Ford), we believe the company will see more pressure relative to its peer, and competition in this segment will weigh on GM’s ability to drive positive pricing.
All of which should result in a ‘minor’ 24% decline North American EBIT in 2018.
Oh, and Goldman figures it also doesn’t help that GM’s stock recently soared to record high multiples just as earnings are getting set to collapse.
Meanwhile, GM shareholders are finally starting to take notice that at a 35% surge in share price, or $18.5 billion in market cap, might not have been completely warranted just because a couple of hurricanes wiped out a few cars in Texas and Florida.
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