Across the board, 2017 has been a good year for General Motors Company (NYSE:GM), and for the company, not just GM stock. The GM stock price has risen 21% so far this year – but the good news goes beyond just the chart.
General Motors has exited its money-losing Europe business, a move I applauded at the time. GM has established its bona fides in electric vehicles and self-driving cars. Rival Ford Motor Company (NYSE:F) changed CEOs in May in large part because its board felt it was falling behind in both areas. GM’s adjusted earnings even have risen over 4% year-to-date.
It’s been a year of progress for General Motors and GM stock, but I’m skeptical that progress will repeat in 2018. Headwinds are rising in the key U.S. market. The financial benefit of exiting Europe will be lapped next year. And neither Ford nor GM has been able to grab huge market share in Asia.
At 7.2x forward earnings, the GM stock price admittedly incorporates some pressure. And I’m far from convinced that GM stock necessarily will decline in 2018. But at the least, I expect it to be a tougher year, and I’d be very surprised to see another 20%+ gain for GM investors.
Short-Term Risks
Current predictions (see here and here) suggest U.S. car sales will again decline in 2018, one potential near-term risk for GM sales and earnings. And in fact, overall, analysts see General Motors EPS declining year-over-year in both 2018 and 2019.
That alone isn’t enough to make GM stock a sell, but it is a risk in the near-term. The auto industry moves in cycles, of course, and sales of late have been strong. Low interest rates and easy credit have helped – and both are starting to reverse. The downturn in 2008-09 pushed back replacement demand, which similarly helped push 2016 sales to a record.
For Ford and GM, in particular, and to a lesser extent rivals like Toyota Motor Corp (ADR) (NYSE:TM) and Fiat Chrysler Automobiles NV (NYSE:FCAU), there’s been another tailwind: low gas prices. The combination of a strong economy, loose credit, low interest rates, and $2+ gas has pushed consumers into larger and much more profitable vehicles.
Pickup truck sales continue to be strong; with per-unit profits more than triple those of passenger cars, those sales have helped margins and earnings. The U.S. market, then, presents some risk as GM heads into 2018.
Interest rates are rising, which will impact some of the financing and lease deals available. A glut in U.S. used cars presents its own challenges, making leases more expensive (as dealers are less willing to take back a 2- or 3-year-old car) and providing an alternative to buying new.
And with Ford’s F-150 still dominant in pickups, GM’s ability to benefit from higher-profit trucks is less than that of its rival.
Simply from a near-term standpoint, the 7x forward multiple isn’t nearly as attractive as it first looks. GM is near the top of the cycle, which suggests multiples should contract. Profits likely are going to come down in both 2018 and 2019. And, at the moment, there’s not a clear catalyst for a rebound in self-combustion engines as the next decade starts.
Indeed, there’s a very real risk, as I wrote about Ford back in May, of peak auto; that 2016 unit sales in the U.S. might not be a peak, but the peak going forward.
Long-Term View
For GM stock to rise in 2018, either the sales performance has to be better than expected or, as is more likely, the company’s long-term ambitions have to show more promise. Admittedly, GM is starting to look well-positioned for both electric vehicles and the self-driving revolution.
GM already has announced that it plans to have self-driving Chevy Bolts available for taxi services by 2019. It is racing (no pun intended) Alphabet Inc (NASDAQ:GOOGL) unit Waymo, who has ambitions of its own, along with myriad other players. But at the least, GM has shown a surprisingly nimble approach to changes that likely will have a negative impact on its legacy business.
In EVs, too, General Motors is showing reason for optimism. It doesn’t seem a coincidence that both Ford stock and the GM stock price started rallying toward the end of August and that Tesla Inc (NASDAQ:TSLA) stock peaked in the middle of September.
Clearly, the market has changed its assumptions about how much market share Tesla will gain and how much Ford and GM will lose. If GM can create more confidence on that front in 2018, that pattern may continue.
A Lot to Ask
From here, however, the challenges still seem greater than the opportunities. For GM, any wins in self-driving cars and EVs are going to do little more than offset the corresponding losses in its still-more-profitable combustion businesses.
Self-driving cars have a risk of significantly decreasing overall car demand. Why own a car if one will show up at your doorstep on demand? Electric vehicles similarly don’t increase net demand, and CEO Mary Barra has said those vehicles will be profitable by 2021.
There’s just a lot of risk here. In the second half of 2017, investors have focused mostly on the rewards, and bid up the GM stock price as a result. But if that changes in 2018, and I expect it will, next year won’t be as fun for GM shareholders as 2017 was.
As of this writing, Vince Martin has no positions in any securities mentioned.
