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Does GM's Decline Signal Problems for the Economy?


November was the best U.S. sales month in six-and-a-half years, with the seasonally adjusted annual sales rate reaching 16.3 million, the highest total since February 2007. But in January, the SAAR had fallen to 15.2 million.

Since Labor Day, U.S. new-vehicle sales have risen just 2% year over year, compared with a 10% gain in the 12 months before that, and inventory levels are high, according to Automotive News.

The trade journal reported Monday that "supplies of unsold vehicles have ballooned to the highest level since the recession, and U.S. sales growth has slowed significantly in the past five months" and called the trend "an ominous combination that could mean a return of bigger discounts and lower profit margins throughout 2014.

"Each of the Detroit 3 started February with more than a 100-day supply of unsold vehicles, enough to last until roughly Memorial Day at the slow January selling rate," Automotive News said. "Across the industry, automakers had 88 days' worth of vehicles as of Feb. 1, the most for that date since 2009, when the industry's downturn was at its worst."

Lache isn't worried by the high inventories. He said inventories typically decline by 25 days between January and March. "This year's declines should be even larger," he said, because weather contributed to higher inventories. Additionally, he said, "GM and Ford both appear to be taking a conservative stance on production."

In the fourth quarter, GM reported net income excluding items of 67 cents a share. Analysts surveyed by Thomson Reuters had estimated 87 cents. GM shares closed that day at $35.23, down a penny from the previous close, despite being down 88 cents in intraday trading.

UBS analyst Colin Langan wrote in a report that shares initially lost ground on the earnings miss, but recovered on the realization that the miss was due to one-time factors. He maintained a buy rating and raised his target price to $52 from $49, but he reduced his full-year 2014 estimate to $3.70 from $3.90 a share. Analysts surveyed by Thomson Reuters are estimating $3.93.

In his report, Lache noted that "much of the U.S. auto cycle and GM product cycle is behind us," although he said he still believes "that strong North America earnings, market share, inventory trends and share repurchase announcements will be helpful" for GM. He has a buy on the shares and a target price of $48, down from $52, reflecting a reduced 2014 estimate of $3.55, down from $3.90 a share.

Written by Ted Reed in Charlotte, N.C.

To contact this writer, click here.

Follow @tedreednc

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