The New GM
12/22/2015 7:00 am EST
Our latest Focus Stock—the largest US producer of cars and trucks—carries S&P Capital IQ's highest investment recommendation of 5-Stars or strong buy, asserts Efraim Levy, S&P Capital IQ analyst in S&P's The Outlook.
General Motors (GM) will generate about $147 billion in revenues in 2015 and $149 billion in 2016.
Our recommendation is based on our expectations GM will benefit from rising global vehicle demand led by growth in the US and China, improvement in Europe, and a supportive balance sheet.
Detroit-based General Motors entered and exited bankruptcy protection in 2009 and emerged financially and culturally stronger from it, in our view.
We think the new GM is more customer-centric, focused on the long-term, somewhat less bureaucratic (although we feel there's still room for improvement), and more disciplined in pricing and incentives than the old GM.
The company is taking advantage of its rejuvenated and more appealing vehicle offerings, in our view, amid a rising US and global market. In addition, it is investing in alternate propulsion vehicles and autonomous driving vehicles.
S&P Capital IQ Equity Research forecasts that US new light vehicle sales volume will rise 5.9% to 17.4 million units in 2015—a new industry record—and peak at 17.6 million in 2016.
We see profit margins in 2015 benefiting from improved volume, an improved sales mix, and a reduction in prelaunch costs. Restructuring and recall-related expenses should be lower.
Combined with a reduced and more flexible cost structure, these factors position GM for sharply higher profits in 2015.
North America profits with its rich mix of trucks and strong volume should be the biggest profit contributor. Average transaction prices have been rising and companies—including GM—have been fairly disciplined with incentive spending.
We consider the balance sheet to be sufficiently strong to maintain its dividend while supporting product investment throughout the business cycle and cash claims such as unfunded pension obligations.
At September 30, the company had automotive cash and marketable securities of $23.5 billion. We expect more than $5 billion in buybacks in 2015 to be accretive to EPS this year and to EPS in the following year.
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