Stephanie Link: Still a Solid Case for Beaten-Down GM
By: Stephanie Link | 02/11/14 - 02:58 PM EST
NEW YORK (TheStreet
) -- General Motors (GM)
shares have fallen 15.8% from the highs on fears about a price war with Ford (F)
and others. After a strong recovery in 2013 for the auto makers, the recent data points haven't been favorable for the group on fears of higher incentives, rising inventory levels and a fragile consumer.
Ford lowered its 2014 earnings estimates in December, which was then was followed by GM reducing its earnings guidance at the Detroit Auto Show in January. Over the weekend there were articles suggesting all-out price wars in the industry with GM offering as much as $7,000 off of its entire line and Ford also discounting heavily by as much as $3,000 to $4,000 per vehicle. The weather is certainly playing havoc on sales but just how much of this is weather vs. demand deceleration remains unclear.
It certainly feels like just about every day we get an earnings warning from a consumer company like Kohl's (KSS)
, Coach (COH)
, Wal-Mart (WMT)
, etc. Even McDonald's (MCD)
January comp in the US fell more than expected at 3.3%. A lot of these stories are company specific, but it's clear the consumer is choosier - having to decide between refurnishing his/her house, buying a car, or spending on clothing.
With wage growth flat over the last few years - there are choices that have to be made. One or the other. I think the replacement cycle story in autos remains compelling, with the average age of the US car now at 11 years old. At the same time banks' standards are looser for auto loans and used vehicle prices have remained stubbornly high. All of this bears watching and the rise in inventories will be key going forward. As of now they are still under control (even though January and February have seen increases from the average 64 days seen over the last year).
The reality is - there are incentives being given out right now, but it's usually pretty typical for the industry to do so around the President's Day Holiday - usually discounts are around 10% to drive store traffic during this seasonally slower period. And, yes, GM is offering $7,000 discounts on certain vehicles but it's not "all" of its products and many are on the older GMC line.
Just last week, the company produced a new record in earnings in North America driven by better volumes and pricing. Margins also improved to 7.5% from 5.3% year over year and the company has a restructuring under way that should lead to 10% margins by mid-decade in North America.
It also has taken aggressive actions to return to profitability in Europe by mid-2015 and restructuring efforts should also help its cost structure going forward. Not all is perfect, and there is a lot of work that needs to be done in its International operations (although it just reported record earnings in China last week as well) and South America.
But down 15.8% from its highs, the stock is discounting a lot of bad news and now yields 3.4%. Plus, free cash flow will reach $5.5 billion this year even with losses seen in Europe, a $1.1 billion restructuring charge and headwinds in its International division. It has aggressive cost cutting efforts under way, has closed unprofitable plants, moved many of its products onto the same assembly lines, and has a new truck line up that should lead to better market share gains. In other words, this is a restructuring story - which should show an improvement to EBITDA, cash flow, margins and market share. The macro is important, but the internal reorganization is also appealing - especially at 8x forward estimates.
--Written by Stephanie Link in New York.
Action Alerts PLUS, which Link co-manages as a charitable trust, is long GM.