General Motors Co.'s (NYSE:GM) decision to shut down its North American assembly plants on March 18 came quite late in the quarter, sparing the period from the worst financial effects of COVID-19, which likely will show up in the current quarter's results and whose impact won't be public until late July or early August.
GM Q1 Earnings statement; Source: GM
Accordingly, GM still was able to eke out a $300 million profit for the quarter on a GAAP basis - down 86.7% from a year ago - and a $1.2 billion profit on an EBIT-adjusted basis, down 46%. Profitability hardly is the point at the moment. Liquidity remains the overarching concern as the company signals its intention to reopen its assembly plants on May 18.
GM, which books revenue as its vehicles leave the assembly plants, lost about 12 days of production in the first quarter. In the current quarter, production in April is nil and likewise so far in May, suggesting that Q2 results will be much uglier than for Q1. On the plus side, GM in Q2 will be ramping up assembly of its new line of full-size of SUVs, which generate disproportionate cash and profit. Chinese post-corona automotive demand is beginning to pick up, good news for GM's two joint ventures that reported double-digit growth in April.
2021 Cadillac Escalade reveal; Source: GM
Drastic action
With deep economic uncertainty in North America, GM moved aggressively in March and April to reinforce its liquidity, suspending the dividend and share buybacks while lining up additional credit. On April 14, the company arranged a $1.95 billion credit facility for GM Financial, which lends to retail buyers and to dealers. On April 24 GM extended a $3.6 billion credit facility for an additional year. Additionally, the automaker indicated it has stretched out some capital expenditures, furloughed some salaried employees, partially deferred some salaries and taken other steps to conserve cash.
GM said it will begin reopening its U.S. and Canadian assembly plants on May 18. Michigan's governor, Gretchen Whitmer, said other manufacturing plants in the state, some of which produce auto parts for final assembly plants, can open on Monday. If all goes according to plan, GM could be booking revenue again by the week of May 18.
Analysts have said that GM's automotive liquidity could last until the end of the year in the event of no additional revenue. Though it's hard to imagine such an eventuality - no one six months ago could have imagined the events that the global health crisis has visited upon populations and economies.
Dented balance sheet
Even assuming that automotive demand slowly rebounds and factories return to normal production, the hit to GM's finances has been profound and is unlikely to be soon remediated. This morning (May 7) Fitch Ratings downgraded General Motors Co.'s long-term issuer default rating to BBB-minus from BBB, putting it one notch above junk status. Moody's and S&P already have issued warnings that their ratings for GM - already teetering near junk status - could be lowered.
Fitch said it...
"...expects the macro environment to remain weak through the rest of 2020 and much of 2021, which will likely keep sales volumes well below the 2019 level into much of 2022. The company's more concentrated operations, with its automotive FCF completely dependent on the North American and Chinese auto markets, could also pose some risk in the future, although it has resulted in less cash burn in the current environment."
The credit rating company went on, optimistically, to say that "GM's ratings and stable outlook reflect the company's strong liquidity position and the expectation that it will retain and investment-grade rating once the peak of the pandemic has passed."
Leadership a plus
Mary Barra, CEO, has proved to be an able and resilient leader who hasn't shrunk from tough calls such as deciding to withdraw GM from Europe, Australia and other markets around the world that haven't generated a sustainable return to shareholders. She moved quickly in the face of the pandemic to take steps to undertake austerity measures to preserve liquidity - and she may be forced to go even further to cut or shrink operations if circumstances warrant it.
Deutsche Bank exemplified those who were impressed with the speed and comprehensiveness of GM's adjustment to the pandemic. In April, the bank's equity analyst lowered the rating on GM to a hold; following the Q1 report, GM was returned to "buy" with a price target of $25 to $30 a share. GM's stock lost about half its value between early February and March 18. The reason for Deutsche Bank's renewed optimism?
"GM's strong 1Q performance and forward-looking outlook, in our view demonstrate the benefit from its proactive actions to transform the business, right size its costs and boost profitability. They should leave GM best positioned to weather challenging 2Q conditions, and yield considerable improvement in profit and free cash flow in 2H and into 2021," said the bank's report.
Another reason influencing Deutsche Bank's optimism is its vested interest in GM as a client in the securities underwriting business. On Thursday (May 7) GM said it will be issuing $4 billion senior unsecured fixed rate notes to further shore up its balance sheet. Deutsche Bank is managing the offering, whose maturities vary from about three to about seven years and whose interest rates from 5.4% to 6.8%. The latest debt offering only highlights the insolvency risk that GM and other major industrial companies face due to uncertainty whether the economic recovery will be quick or prolonged.
E-commerce for cars
Just as consumers may be slow to return to crowded restaurants and football stadiums once the COVID-19 case count has subsided, they also may be reluctant to return in droves to dealership showrooms. GM's Shop-Click-Drive e-commerce tool, which can handle much of the shopping and sales transaction online on behalf of dealers, could prove to be a valuable tool when combined with contactless home deliveries of vehicles. Until now, automotive retailing beyond the customer research dimension has failed to live up to early hype - perhaps the pandemic will drive customers to tools such as GM's.
GM is dead serious about invigorating Shop-Click-Drive. As Barra said in this week's earnings call:
"An additional 750 dealers have enabled Shop-Click-Drive since the COVID outbreak. So now, 85% of the U.S. dealer network is participating in Shop-Click-Drive. Of these 90% offered touchless home delivery experience. In an industry that is down 40% Shop-Click-Drive interactions are up 41%, so visits are at an all-time high. And stay tuned for improvements to Shop-Click-Drive as we are working aggressively to add eight new features and capabilities in the coming weeks."
Like so many, I very much root for GM to prevail in its latest existential crisis. The automaker appears to be doing everything it can to proceed prudently, conserve cash, drop non-essential activities and deploy its human resources wisely. Admiration is in order for the fortitude of so many.
From an investment perspective, I must count myself as neutral, neither bull nor bear, notwithstanding the common shares selling in the low 20s and the dividend suspended.
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