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General Motors: Momentum Stock That Will Continue To Deliver A Reliable Annual Short


GM has repositioned itself for an autonomous and emission-free auto industry.

Repositioning does not reduce systemic risks in the auto industry and will increase capital needs, fixed costs needs, and adoption risk, as it creates value.

If you are generally long on GM with intermittent shorts, then rest easy: your strategy is just right for the next three years.

The closure of the Detroit, Ohio and other GMNA facilities is perhaps GM’s most dramatic move to show investors a commitment to a new business model. The exit is expected to pay out some $6 billion in savings by 2020.

The $6 bn. in savings is mostly (4.5 billion) comprised of capital expenditure savings from the closing the GNMA facilities that operated under capacity, which included a 15% cut in personnel expenditure, compressing the vehicle portfolio to focus on high-margin segments (trucks, SUVs, and crossovers), and optimizing tech sharing across perceptible vehicle architecture.

These cost savings will no doubt allow GM to invest more capital into its autonomous Cruise line and accelerate its models to the market. However, the road to autonomous and emission-free vehicles is paved with many short opportunities.

GM has estimated its exit and disposal costs to between $3 bn. and $3.8 bn., including $1.8 bn. non-cash accelerated asset write-downs and about $2 bn. cash-based, employee-related costs --mostly to be incurred 4th quarter, 2018 and 1st quarter, 2019.

Despite its move into the autonomous space, GM will not ease pressure on the systematic risks eroding industry profits. GM will have to cover the high fixed costs of autonomous capability development and deployment in an industry where price-cuts and discounts are the primary drivers of volume. Not only does GM have little control in vehicle price ranges, but the network-effects required for emission-free vehicular success will delay the payout of a low-price high volume strategy.

In the inevitable event of successful market penetration in the emission-free, autonomous space, GM will find that competition was not restricted to GM’s traditional industry: Ford, Honda, Toyota, and Tesla are all racing into to emission-free automated driving. With Tesla’s Sedan model already priced at a discount compared to the early model, a pricing belt is quickly tightening around the industry.

The last reason to intermittently shot GM as the stock gradually appreciates is that the company has no clear marketing strategy: GM’s focus on trucks and crossovers, currently producing the highest revenues at 25.6% and 15% respective market shares (compared with 11% cars/sedans) is at odds with the present buying preferences of millennials, who are likely to be early mass-adopters of the self-driving emission-free tech. This preference mismatch will delay GM’s adoption rate, exposing it to high-fixed cost risk for years.

All of these factors will present favorable opportunities for shorting GM intermittently between 2019 and 2023, but none of these factors will permanently erode the growth that the auto-