North American Pricing Decline And Tariff Uncertainties Will Erode Margins

Key Takeaways

• Anticipated North American pricing decline and higher incentives may negatively impact GM's gross margins and profitability.
  
• Lack of substantial growth in EV volumes and higher warranty costs may compress margins and hinder financial performance targets.
  
• Strategic pricing, EV growth, and partnerships aim to enhance GM's revenue, profitability, and balance sheet, with focus on cost-efficiency and innovation.

Catalysts

Designs, builds, and sells trucks, crossovers, cars, and automobile parts worldwide.

• General Motors anticipates a decline in North American pricing by 1% to 1.5%, accounting for potentially higher incentives or a moderation in average transaction prices, which could adversely impact gross margins and profitability.
  
• The forecasted headwinds in ICE wholesale volume, partly due to a lack of restocking, combined with expected higher EV volumes, may result in unfavorable revenue mix shifts, impacting overall revenue growth and operating margins negatively.
  
• Policy uncertainties, such as potential tariff challenges without clarity on government changes, could lead to increased operational costs and pressures on net margins, given GM's global production and supply chain intricacies.
  
• Higher warranty and legal costs, evidenced by recent settlements and regulatory landscape pressures, have been inflating repair expenses, potentially compressing net margins and affecting profit outlooks.
  
• The slower-than-expected growth trajectory in EV volumes, compared to earlier projections, may delay anticipated cost efficiencies from scale, affecting EBIT improvements and overall financial performance targets.

General Motors Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on General Motors compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming General Motors's revenue will decrease by 5.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 3.8% today to 1.3% in 3 years time.
• The bearish analysts expect earnings to reach $2.1 billion (and earnings per share of $2.2) by about April 2028, down from $7.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.7x on those 2028 earnings, up from 6.1x today. This future PE is greater than the current PE for the US Auto industry at 18.0x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

General Motors Future Earnings Per Share Growth

Risks

• General Motors achieved a 9% increase in full year revenue, reaching $187 billion, supported by strong sales and strategic pricing, which can positively impact both revenue and net margins going forward.
  
• GM's EV business experienced significant growth, with 189,000 vehicles wholesaled in North America and an EV portfolio that became variable profit-positive in the fourth quarter, suggesting potential for improved earnings and future profitability.
  
• The company's strategic capital allocation, including a forecasted 2025 capital spend of $10 billion to $11 billion and its plans to optimize costs through restructuring and partnerships, indicates a focus on maintaining a strong balance sheet and net margins.
  
• GM's partnerships and collaborations, such as those with Hyundai, aim to lower costs and enhance capital efficiency, which could enhance net margins and earnings.
  
• The expansion of Super Cruise across all brands and the potential for high-margin revenue streams from subscriptions show promise for boosting future revenue and net profit margins.

Valuation

• The assumed bearish price target for General Motors is $41.4, which represents one standard deviation below the consensus price target of $56.62. This valuation is based on what can be assumed as the expectations of General Motors's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $105.0, and the most bearish reporting a price target of just $34.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $159.2 billion, earnings will come to $2.1 billion, and it would be trading on a PE ratio of 21.7x, assuming you use a discount rate of 11.4%.
• Given the current share price of $44.22, the bearish analyst price target of $41.4 is 6.8% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts 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.