GM Could Have Difficulty Achieving Its Year-End Inventory Target

General Motors Company GM reiterated at the end of August its year-end target of lowering its 88 days of U.S. inventory down to 70 days. However, after taking a deep dive into the automaker's prospects, Buckingham Research Group's Joseph Amaturo has some doubts the targets can be achieved — although the gap will be narrowed (see his track record here).

The analyst's calculations concluded that General Motors will end the year with approximately 84 days of inventory. This implies that an incremental 140,000 units of production will need to be cut for the company to achieve its 70-day target.

The financial implications to this in the bottom half of 2017 and 2018 will depend on the mix of vehicles that would be cut although most of the cuts will be cars, Amaturo stated. It is important to note that the 140,000 unit represents approximately 4 percent of IHS's forecast for General Motors' North American production rate in 2017.

From a different perspective and the analyst's "base case assumption," a 17.7 million sales pace for fiscal 2017 would be the minimum sales level required for General Motors year-ending inventory to drop to the guided 70 days.

Amaturo maintains a Neutral rating on General Motors' stock with an unchanged $33 price target, which implies downside from Wednesday's closing price of $37.67. The price target assumes a 5.2x multiple on 2017 EPS estimates and also implies an 11.5-percent automotive free cash flow yield on the analyst's estimate of $5.6 billion.

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