We already have General Motors (NYSE:GM) here as a post-FQ3’22 earnings article in November 2022. At that time, the company reported exemplary sales and earnings growth QoQ and YoY on its continued gross margins of 14.1% versus 14.4% in FQ3’22 FQ3’21. These lifted earnings per share to $2.25 from the consensus estimate of $1.88. However, reduced FCF generation also resulted in a more prudent dividend payout for the quarter, which may disappoint some investors.
In this article, we focus on GM’s near-term prospects, which are partially owned by Tesla (TSLA) aggressive price cuts in early January. The latter’s move has had a direct impact due to perceived fear of the auto industry as a whole reduced profitability during the uncertain macroeconomics to 2023. Pessimism has of course helped trigger the recent correction in the former rate target by -14.8%. We will discuss this further.
Because of this, Mr. Market downgraded GM’s forward execution
GM 1Y EV/Sales and P/E ratings
GM currently trades on EV/NTM revenue of 0.91x and NTM P/E of 5.73x, down from its 3-year pre-pandemic median of 0.94x and 6.21x, respectively. Otherwise, it’s still below its 1-year median of 0.95x and 5.92x, respectively.
GM 1Y Stock Price
Based on GM’s forecast earnings per share for fiscal 2024 of $6.01 and current P/E valuations, we have a moderate price target of $34.43. Market analysts are naturally more bullish on $43, which suggests a notable upside potential of 18% from current levels. Indeed, this optimism is not surprising given that the stock is currently trading at a historically low price-to-earnings ratio, indicating Mr. Market’s bearish sentiment.
However, in our view, the pessimism is warranted for now as TSLA throws a curve ball on Jan 13, 2023. The latter did drastically reduced prices of its vehicles sold in the United States will be eligible for the $7.5,000 Inflation Reduction Act tax rebate beginning in 2023. Analyst Daniel Ives of Wedbush said:
This is a clear shot across the bows of European automakers and US stars (GM and Ford) that Tesla will not play well in the sandbox in an EV price war that is now underway. Margins will be hurt, but we like this strategic poker move from Musk and Tesla. (NPR)
TSLA’s Model Y and Model 3 are now priced at $52.99K and $43.99K, respectively, representing a drastic drop of -19.6% and -6.4% from their prices of $65.99K and 46, $99,000 in 2022. On the other hand, we have to highlight that the automaker has also raised the MSRP several times, which is attributed to rising inflationary pressures, however 2019 prices from $39,000 and $36,200or.
However, the market development is not promising either CPI December shows a slowdown in the new car index at -0.1%, compared to 0.0% in November and 0.4% in October 2022. This is likely due to the increased interest rates, which are reducing vehicle affordability despite the increased availability of vehicles worldwide The supply chain is simplified and car manufacturers increase production.
More and more car buyers in the US are paying more $1,000 for their monthly car loansdriven by increased interest rates of 6.5% for new cars through December 2022, compared to 4.1% at the end of 2021. While the group may now be capped at 15%, it’s evident that the trend is consistent with Average monthly payments for new cars will grow to $717 by the end of 2022, compared to $617 in 2021 and $525 in 2018.
Notably, the average down payment for new cars has also increased to $6.78,000 by the end of 2022compared to $6.02K in Q2’22 and $4.74K in Q1’21. Given that the Fed is set to hike interest rates above 5% by mid-2023 and only to a pivot starting in 2024, it’s no surprise market analysts seem pessimistic about the entire automobile market as a whole.
As a result, will GM also cut its MSRP?
This is indeed the most important question, although our best guess is unlikely. Therefore. GM just increased prices for the 2023 Chevy Bolt EV by $600 to $27.8,000 on January 3, 2023, likely due to its eligibility the full $7.5K tax creditinstead of the original $3.75,000.
However, this number reflects management’s efforts to offer the best value for money, as it is significantly cheaper -$3.7K compared to the 2022 model, -$8.7k for the 2021 model and -$9.7k for the original launch in 2017. Of course, since the model remains the cheapest electric vehicle available in the US, this improves the company’s chances of success in times of tight discretionary power Expenditure. On the other hand, it remains to be seen how the model will affect market sentiment as the company only plans to ramp up production 70,000 units annually in 2023.
Silverado EV introductory price from GM
GM’s price hikes for other models so far have also been in line with industry trends, similar to its peers such as TSLA and Ford (f). The former’s flagship, Chevy Silverado EV, was originally launched with an MSRP of $42,000, which of course indicates the entry-level Work Trim (WT).
However, recent announcements have shown that the 3WT starts at $72.9K and the 4WT starting at $77.9k, with the WT coming later. Notably, these numbers will bring it closer to the mid-level LTZ with the previously estimated $75,000 MSRP, or the RST (High-End Fully Loaded) version at $107,000.
F’s F-150 Lightning introductory price range
Those numbers aren’t too far off from the entry-level F-150 Lightning F, either, which it was increased by 40.1% from an introductory price of $40,000 to $56,000 by December 2022. The company also has XLT, its mid-level trim at $66.01,000 (+24.6%) with the Platinum, top trim level, now at $97.81K (+7.6%).
In addition, GM has raised its Hummer EV prices around $6.25,000 from the original area between $79.99K and $99.99K. These increases are, of course, attributed to rising inflationary pressures in labor and material costs, which many other automakers are similarly experiencing.
On the one hand, GM management has been very competent in offering EVs in different price ranges in order to cater to a wide group of loyal fans with different purchasing power. The long-term outlook therefore also looks robust, especially if the Fed achieves its target inflation rate of 2% by mid-2024. Market analysts expect the company to post sales of $169.25 billion and earnings per share of $6.69 in fiscal 2025, indicating a decent CAGR of 7.4% and -1.4%, respectively.
However, we cannot deny that there could be some recessionary pressures into 2023 as interest rates remain elevated in the short term. While existing reservations continue to be duly factored in, it’s not hard to see why future consumer demand could temporarily weaken. These could potentially create further headwinds for GM’s stock valuations, which will be significantly worsened by a potential price war.
While GM Deliveries in 2022 have been excellent, its profit margins have also been compressed. The company announced this Automotive gross margin of 11.3% and automotive operating margins of 4.3% over the last three quarters TSLA’s market-leading automotive gross margins of 29.5% at the same time.
It’s evident that GM’s financial segment was the star of the show, contributing operating margins of 33.2%, taking the company’s total operating margins to 8.8%, versus TSLA’s total operating margins of 17.1%. So it’s not surprising that market analysts are increasingly concerned about the former’s next move, given that a price cut can of course hurt already tight auto margins.
As such, we prefer to rate GM stock as Hold due to the potential for volatility for now. In the meantime, with the company scheduled to report its fourth-quarter 2022 results on January 31, 2023, it would be prudent to hear more from management as well.