(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Like other automakers, General Motors Co. (GM) has benefitted from the lengthy U.S. economic expansion, its profits surging and sales rising nearly 50% during the past eight years as consumers scooped up popular vehicles such as the Chevy Equinox SUV and GMC Sierra pickup truck.
Falling Sales, Shrinking Margins
But that growth, all the more notable as GM emerged from bankruptcy in 2009, conceals major challenges facing the No. 1 U.S. automaker. Despite GM's rebound, sales have stalled for the past several years even as employment growth boosted American consumers' spending power. GM's stock has missed the bull stock market. And its vehicle market share last year fell in North America, Asia, the Middle East and other markets as its battles a slowdown in China.
Now, the biggest challenge for GM and CEO Mary Barra is preparing the giant company for an economic slowdown in the U.S. and globally.
Bracing For A Slowing Economy
GM will get no relief anytime soon. It's suffering from soaring costs, falling operating income and weak sales. That's because analysts see hardly any growth for the company through the year 2021. Currently, forecasts are for revenue to rise by less than 1% in 2021 to $148.2 billion from $147.1 billion in 2018. Meanwhile, earnings in 2019 are expected to drop 1%, followed by a further decline in 2020. Analysts do not see GM’s profits growing again until 2021. Analysts seem so skeptical on GM’s outlook that their earnings estimates for 2019 are well below GM’s 2019 earnings guidance.
With little revenue growth and rising costs, GM’s margins have fallen substantially over the past several quarters. Operating margins fell by nearly 9 percentage points to 2.2% in the fourth quarter from a high of 11% in the fourth quarter of 2015. Operating income last year fell by nearly half to $4.4 billion from $8.6 billion. Weak sales will pressure GM to control those costs even more in 2019 or face steeper earnings declines.
The Stocks Struggles Will Continue
GM's stock, for investors, has gone virtually nowhere since the company's $50 billion U.S. bailout and emergence from bankruptcy. The shares have risen 14% since November of 2010, far behind the 130% rise in the S&P 500. The tenure of Mary Barra, the latest CEO, also has been rocky. Since she took over on January 15, 2014, the stock has fallen 1% compared to the S&P 500 increase of 49%. The silver lining in this is that GM's major domestic rival, Ford Motor Co., suffered a decline of 44% during the same period.
The outlook for the stock is not much better. Options traders bet the stock will drop. The $38 puts for expiration on January 17, 2020 outweigh the number of calls by nearly 2 to 1, with about 12,000 open put contracts. For a buyer of those puts to earn a profit the stock would need to fall 12% to $34.25 by the beginning of next year. There are large open put positions at the $30, $33, and $35 strike prices as well, also reflecting a bearish outlook.
The chart for GM suggests the stock may be in the process of forming a double bottom. The stock has struggled mightily to rise above a resistance zone of around $40. Should the stock rise above that zone the shares could rise to around $43, where it would come in contact with a long-term downtrend. However, should the stock fail to break, out it is likely to retest its lows around $32. The trend in the relative strength index is bearish and suggests the stock falls.
The poor performance of GM's stock highlights the extreme skepticism many investors have about the automaker despite its dramatic operational improvements during the economic expansion. Those improvements are one reason why Japan’s Softbank Group Corp. is betting $2.25 billion on GM’s unit that focuses on electric and autonomous vehicles. GM's success in selling these kinds of next generation vehicles may help determine whether its stock recovers longterm.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past 12 months. Past performance is not indicative of future performance.