GM's Struggle With Pricing Power And Market Pressure Could Erode Margins

Key Takeaways

• Competitive pressures and lower industry pricing in the US could compress GM's net margins amidst ongoing market challenges.
  
• Risks in the Chinese market due to needed restructuring could reduce GM's earnings and profitability internationally.
  
• GM's strategic focus on inventory management, EV production, and battery partnerships is enhancing market share, profitability, and long-term competitiveness in key markets.

Catalysts

Designs, builds, and sells trucks, crossovers, cars, and automobile parts; and provide software-enabled services and subscriptions worldwide.

• GM's expectation of continued lower ICE wholesale volume due to multiple production downtimes and ramp-ups of refreshed full-size SUVs could negatively impact revenue growth prospects.
  
• Competition in the U.S. market has led to lower industry pricing, which, coupled with GM's aim to maintain lower incentives than competitors, might compress net margins if market pressures persist.
  
• Supply chain disruptions due to external factors like hurricanes, which have already affected production rates, could lead to increased operational costs and lower earnings if such incidents reoccur.
  
• Intensified price normalization and competitive actions are expected to contribute to headwinds, potentially impacting GM's pricing power and net margins.
  
• The challenging Chinese market environment and a necessity for restructuring actions expose GM to risks of lower earnings and profitability from one of their major international markets.

General Motors Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming General Motors's revenue will decrease by 0.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 6.0% today to 4.3% in 3 years time.
• Analysts expect earnings to reach $8.1 billion (and earnings per share of $8.38) by about October 2027, down from $11.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $13.6 billion in earnings, and the most bearish expecting $5.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2027 earnings, up from 5.5x today. This future PE is lower than the current PE for the US Auto industry at 18.2x.
• Analysts expect the number of shares outstanding to decline by 4.89% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.74%, as per the Simply Wall St company report.

General Motors Future Earnings Per Share Growth

Risks

• GM is successfully growing its retail market share in the U.S. with strong pricing and well-managed inventories, suggesting potential revenue stability and growth.
  
• The company expects its full-year EBIT to be in the range of $14 billion to $15 billion, indicating robust earnings performance and financial health.
  
• GM's EV strategy shows progress, with plans to produce 200,000 EVs in North America this year and make the portfolio variable profit-positive, which could support future earnings.
  
• GM's investment in battery manufacturing capabilities and partnerships, like the one with LG, suggest a reduction in production costs, benefiting profit margins.
  
• In China, GM's EV and plug-in hybrid sales growth and efforts to align production with demand could help improve revenues and margins in a challenging market.

Valuation

• The analysts have a consensus price target of $55.73 for General Motors based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $85.0, and the most bearish reporting a price target of just $33.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $187.9 billion, earnings will come to $8.1 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of $53.73, the analyst's price target of $55.73 is 3.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.