Why Did General Motors Drop? (NYSE:GM)

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Summary

General Motors stock has dropped by nearly 20% in recent months.
This article discusses several items that may have led to the precipitous decline.
The dividend is safe, for now, but investors should take a closer look.

On October 16, I published Should You Sell GM? in which I rated the company Sell. Since then, General Motors (NYSE:GM) stock has reversed all of its nearly 25% increase in September and October of last year:

What Is Happening?

There are several key reasons why the stock has recently underperformed:

Autonomous driving developments;
Institutional sales;
Steel and aluminum tariffs;
Interest rates; and
Company-specific news.

Let's review these items.

Autonomous Driving

In a previous article, I illustrated how the surge in GM's stock had coincided with a series of positive news and analyst commentary on GM's "lead" in autonomous driving, following which I explained why GM may not in fact have a lead in the race to a solution that is sustainable and profitable in the longer term.

Subsequently on February 19, I explained how Tesla's (TSLA) approach to autonomous driving differs from those of others including General Motors, and included Elon's Musk's key comment during Tesla's most recent earnings call:

They're going to have a whole bunch of expensive equipment, most of which makes the car expensive, ugly and unnecessary. And I think they will find themselves at a competitive disadvantage.

I recommend that readers review the "hardware heavy" vs. "hardware light" comparison illustrated in that article, as market participants may now be shifting their focus from "who will get to full autonomy first?" to "who will create a profitable business model sustainable in the longer term?"

Institutional Sales

Recent filings show that two-thirds of the company's top 15 institutional investors, including Warren Buffett's Berkshire Hathaway (BRK.A) (BRK.B), have recently lowered their respective positions in General Motors:

^{Source: NASDAQ}

As I always say, for every seller, there is a buyer, but a net sale from top investors to the extent illustrated above should at least be pointed out. We will not know if top investors continued or stopped selling the company's stock in 1Q18 until the next round of filings surface in mid-May.

Steel and Aluminum Tariffs

Automaker stocks dove this week after the White House administration announced that it planned to set tariffs of 25% for steel and 10% for aluminum, both of which are key materials across many sectors, but especially in the automotive industry.

Although I understand the investor concern around rising costs, I also agree with the U.S. Commerce Secretary, Mr. Willbur Ross that:

There’s about 1 ton of steel in a car. The price of a ton of steel is $700 or so, so 25% on that would be one half of 1% price increase on the typical $35,000 car. So it’s no big deal.

Nonetheless, rising costs are never a good thing in an industry with razor-thin profit margins.

Surging Interest Rates

The 2-year and 5-year interest rates have substantially increased throughout the last six months:

Surging interest rates may increase default rates on existing leases, while also reducing demand for new ones. Investors should keep an eye on the company's charge-offs in the coming quarterly announcements, as I discussed further in Ford Credit: Strength Or Weakness?

Company-Specific News

The following is a list of recent news that investors likely did not take positively:

General Motors announced that the UAW Retiree Medical Benefits Trust intends to sell 40 million shares in a secondary offering, which dilutes existing shareholders to some extent, even though General Motors noted that it intends to repurchase from the underwriters a portion of the offering;
General Motors said its human resources chief Jose Tomas was leaving the company, which may negatively affect the company's recruiting efforts, as it looks to attract Silicon Valley talent; and
The company's unit sales dropped by 6.9% in February to 220,905 units, or more than twice the rate forecasted by Edmunds. Investors do not like negative surprises.

Is The Dividend Safe?

Following the recent plunge in the stock price, the company's dividend yield has increase to above 4.0%:

The following table from the company's latest earnings release illustrates that General Motors' adjusted automotive free cash flow dropped year-over-year by $3.0 billion to $5.2 billion:

Given the rising rates and the total debt balance on the company's balance sheet, the year-over-year drop in the automotive free cash flow is not ideal. On a positive note, the company's non-GAAP adjusted Earnings Before Interest and Taxes ("EBIT") matched last year's record at $12.8 billion. Given that the company has many levers, including but not limited to scaling back share repurchases if needed, I rate the company's dividend Safe, for now.

Bottom Line

GM's stock dropped precipitously in recent months, wiping out substantial gains registered in September and October of last year. Many top institutional investors have reduced their positions in the last quarter of 2017, which may point to souring investor sentiment. Company-specific news in recent months have not helped either. I continue to rate GM Sell, as it faces 2018 amidst rising interest rates and gasoline prices as well as intense competition.

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This article was written by

ValueAnalyst

8.66K Followers

You'll never see me write a long bio listing all of my credentials and degrees or refer to myself in the third person. I love discussing ideas and I appreciate it when people can play devil's advocate without resorting to personal attacks. In short, I employ a long-only, long-horizon, focused value style, guided by thorough bottom-up research and backed by years of accounting and finance experience. When people ask me "what do you do?" I assume they mean for fun.

Analyst’s Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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