A Deep Dive Into General Motors' Uncertain Future (NYSE:GM)

1.84K Followers

Summary

General Motors faces declining sales, particularly in China, which accounts for 20% of its revenues.
The company is primarily focused on the North American market, with little presence in Europe and South America.
Despite a low valuation and dividend payments, the investment risk-reward ratio is not favorable due to uncertainties in the rapidly changing automotive market.

Klassischer roter 4-türiger Cadillac-Motorwagen aus den 1950er Jahren, der an der Strandpromenade geparkt ist. — umdash9/iStock Editorial via Getty Images

Investment Thesis

General Motors (NYSE:GM) has a low valuation on the surface, is profitable and pays dividends. However, a closer look shows that the number of cars sold tends to fall, especially in China, which still accounts for 20% of revenues and will probably continue to fall. The company generally plays a role almost only in the North American continent, where sales are currently increasing, but EVs seem to be unprofitable. In a rapidly changing market, it is difficult to say who will emerge as winners. Can the American market compensate for the loss of Chinese sales in the long run? That is impossible to say, and only one of the risks. Overall not a good risk-reward ratio. In the last ten years, the share has given the shareholder a return of only 27%, and the probability of further lost years is too high, in my view. Especially when you consider that you can get safer and higher dividends elsewhere.

Short overview

As of 2022, it was the largest automaker in the United States and was the world's largest for 77 years before Toyota took the top spot in 2008. GM operates manufacturing plants in eight countries, with four core automobile brands: Chevrolet, Buick, GMC, and Cadillac. It also holds interests in Chinese brands Baojun and Wuling via SAIC-GM-Wuling Automobile. In January 2021, GM announced plans to phase out ICE (internal combustion engine) vehicles, including hybrid cars and plug-in hybrids, by 2035 to achieve carbon neutrality by 2040.

GM's China risk

I recently wrote a detailed article about the changing sales in China as the country moves faster than any other country to electric mobility. Western manufacturers have led the way in ICE vehicles, but the Chinese prefer to rely on domestic manufacturers when it comes to electric vehicles. China is a significant market for the company, and we can already see declining sales. GM´s sales figures have generally declined for years and were around 6.3 million units in 2021, according to Statista (see chart further below). In 2021, GM sold 2.9 million vehicles in China, representing 46% of its total sales. In 2022 the number was only 2.3M, and on the following chart, you can see how sales continued to plummet quickly in the last quarter compared to the previous year. Total sales look only slightly worse, as sales in North America are rising, but it is still a worrying development.

GM China sales Q1 2023 — Investor presentation

However, it must also be said that sales and revenues have meanwhile declined to such an extent that in the last quarter, China only contributed $6B to the total revenue of $40B. Meanwhile, the company is almost only focused on the North American continent; in Europe, the company also plays no role, and in South America, the sales are hardly worth mentioning.

Financial Progress & Trends

First, a short overview over a longer period for revenues, expenses, and net income. It's a bit hard to see, but overall, the business has been moving sideways for ten years, and in the post-pandemic period, there was a slight upward trend.

Interesting is this longer-term development if you include the following chart from Statista, which shows that the company peaked in sales in 2016 with 10M and has been falling continuously since then. I wanted to cross-check this statistic with other sources, but it wasn't easy to find info here. So if anyone here has additional information, let's help together and write in the comments.

Number of General Motors vehicles sold worldwide — statista

statista

More or at least the same revenue despite lower car sales should mean better margins, which is the case. This ten-year chart shows a slow upward trend in margins.

However, this development can have various reasons: higher sales prices, additional income from repairs and spare parts, extra income from financing and insurance, income from shareholdings in other companies, currency fluctuations, etc.

Margin pressure ahead?

Keeping revenues steady despite falling sales is remarkable, but the overall trend of declining sales is worrisome. Recently, I've read that several companies, including Mercedes and BMW, are looking to focus on the more expensive and higher-margin vehicle segments. However, there is only limited demand in this segment, and if too many car companies want to focus on this, high margins will not be possible in the long run.

The business models of all these companies are not entirely comparable, but they are still interesting as an overview. What is the trend here? The tendency of falling margins for companies that make the majority of their sales with ICE vehicles and rising margins for pure EV manufacturers (Tesla has recently decided to deliberately lower their strong margins by cutting prices to gain further market share).

But what about all the cheap EVs for which there is a lot of demand? Cheap EVs combined with low running costs would cause mass adoption. Prices have already fallen sharply, and Chevrolet's Bolt series is quite cheap. However, this will be discontinued soon since GM apparently loses money on every sale.

"Bolt is selling better than it ever has since the company dropped the price. On the other hand, that probably also means that they're losing more money than they ever have on that car," said Sam Abuelsamid, a principal analyst at Guidehouse Insights. "So, they don't want to keep it going longer. They're losing money on it. "GM expects to earn low to mid-single-digit adjusted profit margins on its EV portfolio in 2025, excluding any positive impact of clean energy tax credits such as those included in the Inflation Reduction Act.

CNBC: Why GM is killing the Chevy Bolt

The margins of BYD are so low because this is already one of the cheapest manufacturers in the Chinese market. At these prices, Western manufacturers could not offer their vehicles profitably (BYD offers cars starting from below $20k). I don't know if they have profit left at these prices, but overall it's a profitable company. That's the problem for manufacturers like General Motors and Ford; they are pressured by aggressive pricing from the competition. Here is an excerpt from my China article mentioned above:

Producing batteries instead of buying them is one of the reasons why Chinese manufacturers can sell so much cheaper than Western manufacturers. Accordingly, a kind of price war has been raging for several months where manufacturers continue to lower prices to pressure the competition and secure market share. According to Reuters, Chinese manufacturers have a $10,000 cost advantage over foreign competitors. These cost advantages are now being passed on to consumers, possibly until competitors have left the market altogether or caught up sufficiently. Tesla has joined in and made several price reductions, which they can afford because of their excellent efficiency and, thus, margins.

Power Shift: China's EV Market, Impact On Western Brands, And Some Trading Ideas

Q1 Results

I have created this overview of the income statement of the last quarter compared to the previous year, showing where money is spent and how the revenue and cost development is in general. Unfortunately, costs for research and development are not shown separately; I would have been very interested in the development.

Valuation & Outlook

As far as the valuation is concerned, it looks pretty cheap, also compared to the competition. However, it is so that the expensive valued competition, especially Tesla (TSLA) and BYD (OTCPK:BYDDF), are growing much faster while GM and Ford (F) are currently stagnating at best. Furthermore, there are companies such as Mercedes (OTCPK:MBGAF), Volkswagen (OTCPK:VWAGY), and BMW (OTCPK:BMWYY) that are also cheaply valued but pay high dividends; at BMW, for example, they were recently 8% (see here my article about BMW).

Many of these very large old car manufacturers are currently in a similar situation. The majority of sales still come from ICE vehicles, but at the same time, a lot has to be invested in electromobility. There, however, a massive price war is starting at the moment, and there is Chinese competition that simply did not exist in the past for ICE vehicles. I'm not referring to the U.S. market alone but to the entire globe. So this is a point that affects General Motors less than companies like Toyota or Volkswagen. As a result, the net income of all the companies I've examined is falling. Therefore, the companies justifiably get this seemingly cheap valuation; it simply reflects the massive uncertainty as far as future prospects are concerned.

Share dilution and insider trades

The chart of outstanding shares looks a bit strange but seems to show a downward trend for one year. In insider trading, there was only one buy and two sells in the last six months, so overall, not much happened.

Conclusion

In this article, I have not included an extra section for risks as these are already sufficiently covered in the article. There is a longer-term trend of declining sales and generally a lot of uncertainty about the future. Markets as fundamentally changing as the automotive industry are tough to handle both for large companies themselves and for us investors. The falling sales in China will likely continue; although China is no longer of the greatest importance, but still accounts for 20% of revenues: still a considerable downside. Overall, an investment here is too risky, in my opinion. The company operates almost exclusively in the U.S. market and, as such, also has a cluster risk and depends on the development of the U.S. economy. I would not invest here, and if I had the stock, I would sell, given the risks.

Investor's Checklist	Check	Description
Rising revenues?	No	Increasing over longer time periods
Improving margins?	In the past yes, but now falling	Possible competitive edge
PEG ratio below one?	No constant growth, so no PEG ratio	PEG ratio below one may suggest undervaluation
Sufficient cash reserves?	Yes	Vital for the survival & growth
Rewards shareholders?	Yes, but low dividend yield	Returning capital to shareholders
Shareholder negatives?	No	Actions that disadvantage shareholders
Stock in uptrend?	No	Trading above its 200-day moving average?

This article was written by

Manuel Paul Dipold

1.84K Followers

My focus is on a total return style with long and short positions (10-30% short positions). My main expertise is the current technological and geopolitical shift with the amazing investment opportunities they offer. Therefore, I always try to find stocks or whole sectors with favorable risk-reward structures. My long investment style is a core-satellite strategy: The core consists of large caps and/or ETFs. The satellites around this core are small caps, potential 10-baggers, and undervalued stocks. In short selling, I focus on overvalued stocks that will fall back down sooner or later. My name is Manuel Paul Dipold. Born in Germany but lived 8 years in Asia. I am myself an entrepreneur and have many entrepreneur friends. I am not a professional investor but it´s a hobby I love. So I know Europe and Asia very well and seek undervalued or high-growth stocks - always with valuation, geopolitical and social shifts in mind.

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