The bear phase in shares of General Motors Company (NYSE:GM) may finally be over. After the stock closed at 52-week lows at the end of October, a strong quarterly earnings report and a restructuring announcement are both helping General Motor’s share price.
With GM stock up almost 15% in the past month, what happens next for GM stock holders?
GM Restructuring Sends Shares Higher
General Motors announced a major change to its global operations. On Nov. 26, the company said it would close down an assembly plant in Ontario, Canada, letting go of 2,500 union staff and 300 salaried workers.
GM is either following Ford Motor Company (NYSE:F) or taking a strategy based on the same conclusion: sedans are out of favor in North America. So, shutting down the Impala production is expected. But General Motors’ decision to cancel production of the Silverado and Sierra in the full-size pickup segment in the region seems puzzling at first.
After developing the truck having aluminum materials to compete with Ford, it looked as though GM was giving up. It turns out that both models will be produced on a last-generation K2 platform in limited configuration. Production for the 2019 Silverado and Sierra will increase on the T1 platform.
Cost Cuts
The transformation plan will save GM almost $6 billion annually starting in 2020. Together with a major transition toward electric and autonomous vehicles, the company will have just five vehicle architectures in the next decade. The lower overhead will allow the company to cut 15% of its global workforce.
That GM specified that there will be 25% fewer executives involved in the decision process shows how serious it is in cutting the bureaucratic layer.
This transformation will cost GM $3 billion to $3.8 billion. $1.8 billion in costs are non-cash asset write-downs and pension charges, while $2 billion will come from staff cuts.
Valuation Considerations
Even after the stock’s 4.8% rally on the day of the announcement, the stock still trades at a forward price-earnings (P/E) ratio in the 6x range. Its dividend yield is 4.04%, which is still noticeably lower than Ford’s dividend yield of 6.38%. Ford shares also trade in the 6.5 times P/E range, which indicates that the automotive sector is very much out of favor.
Investors are wary over the future growth prospects for gasoline cars. GM and Ford both reported record unit sales recently, but the market is forward-looking. It anticipates a slowdown ahead due to tariffs among trading partners, higher interest rates and fatigue from consumers buying new automobiles.
If GM is right on its forecast, EVs will continue to grow in popularity and truck demand will only increase. Autonomous driving could be years away or it could come even sooner. With the outsized growth for tech firms selling technology solutions to the auto sector, autonomous driving could be the next big thing for the mainstream consumer.
If that happens, GM’s P/E multiples might expand because it might be more appropriately valued like a technology firm that happens to sell cars.
Ambarella Inc (NASDAQ:AMBA) would sure like to see advanced driver-assistance systems (ADAS) picking up sooner. It sells CV1 and CV2 chips that offer autonomous driving technology. BlackBerry (NYSE:BB), too, is transforming itself from handset supplier to secure communications.
The ADAS market is a big part of that transformation strategy.
NXP Semiconductors N.V. (NASDAQ:NXPI) forecast three years ago that the ADAS market would contribute to revenue growth in the double-digits in a few years.
Bottom Line on GM Stock
GM is still trading at discounted levels. The restructuring plan is necessary because the automotive sector is fiercely competitive. GM’s strategy on streamlining its product line will pay off. In the near term, it cuts costs; in the long run, it may pivot its business toward self-driving cars, high-end trucks and electric vehicles.
With that in mind, the analyst consensus target price implying 20% upside seems reasonable.
As of this writing, Chris Lau was long Ford and NXPI stock.
