Did General Motors Company (GM) Discount Too Deeply?

Whether General Motors Company (NYSE:GM) is a buy is largely a matter of perspective. Fans (and owners) of GM stock will certainly tout that fact that the carmaker effectively “won” February, in terms of sales, hoping to prolong the 38% advance that GM has made since its mid-2016 low.

General Motors Company (NYSE:GM); GM stock

Source: Shutterstock

Conversely, those traders who’ve been expecting GM stock to eventually roll over will be quick to point out just how much General Motors had to give up to spur February’s strong sales.

Truth be told, it’s still too soon to make a decisive call. But, it’s not to soon to suggest any GM stock holders should start preparing for the pendulum to swing in the other, ugly direction for a while.

A Strong February …

By all superficial accounts, February was another great month for General Motors, which owns Chevrolet, Buick, GMC, Cadillac, plus a handful of other brands overseas. The company’s total sales were up 4% year-over-year versus a 1% collective decline from all other makes sold in the United States. In fact, it was the best February the company has seen since 2008.

Better yet, GM posted solid February numbers largely on the back of higher-priced and higher-margin pickup trucks. Pickup truck sales grew 18% on a year-over-year basis while SUV sales were up 15%, more than offsetting deteriorating sedan sales.

To put it in automakers’ vernacular, though, check under the hood.

… But With Tainted Results

It’s difficult to pin down the precise stats, though the organizations that do so are usually somewhere near the target — TrueCar’s analytics unit reports that GM’s average buyer-incentive per vehicle was $4,550, or 12.5% of the average selling price of $36,440.

J.D. Power’s calculations indicated the average incentive for all of the automakers last month was 10.3%; any number above 10% is a red flag. It also was the first time since 2009 that February’s incentive average exceeded 10% of the transaction price, and GM was at the high end of the range.

That figure was for both cars and trucks, too. When limited to just trucks — the bulk of General Motors’ business — more red flags wave. For instance, the average discount on the Chevy Silverado truck was a whopping $6,996, according to J.D. Power, and the average incentive on the GMC Sierra was a hefty $5,315. Both price breaks were well above last year’s typical buyer incentive totals for each vehicle, and eat into a big chunk of the estimated $8,000-$10,000 profit for a pickup truck.

GM stock holders will argue that it’s just the cost of doing business and remaining competitive against the likes of Ford Motor Company (NYSE:F) and Fiat Chrysler Automobiles NV (NYSE:FCAU); the former makes the world’s most popular pickup — the F Series — while the latter owns the Dodge brand, maker of Ram trucks.

Neither company discounted their pickup trucks as much as GM did last month and paid the price for it. Ford Motor reported a 4% pullback in sales, while Fiat saw sales drop 10.1% year-over-year.

Sometimes, though, no deal at all is better than a bad deal. Ford and Fiat were willing to hold out for the sake of profitability. GM wasn’t. General Motors spokesman Jim Cain candidly acknowledged: “We wanted to get our fair share in the truck market. The kind of incentives we offer in Truck Month are not the kind of spending we do a on a regular basis.”

That reality will show up on General Motors bottom line at the end of the quarter, at which point GM stock holder could ask, “Was it worth it?”

Bottom Line for GM Stock

One tough month doesn’t make a trend, so anyone still holding GM stock doesn’t necessarily need to panic yet. In fact, the stock’s undertow remains bullish.

On the other hand, all big trends start out with that first small step, and let’s not forget we heard similar alarm bells ringing in January when that month’s incentives were also unusually high. More of this buying may be purely dependent on discounting than it readily seems.

And that seems to be the case, according to Autotrader.com analyst Michelle Krebs. who recently said it’s “taking a lot more incentives now to move the metal than it did last year or certainly the year before. Things are slowing.” She went on to say something even more concerning about automakers: “If this level of incentives continues, it certainly will eat into profits.”

If March’s numbers don’t look terribly different, it may well mark a cyclical lull for automakers.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2017/03/general-motors-company-gm-stock-what-you-should-watch/.

©2021 InvestorPlace Media, LLC