Jefferies On General Motors: 'Red Flags Continue To Accumulate'

“We continue to see low probability of General Motors Company GM re-rating as red flags continue to accumulate, with only valuation supporting the shares,” Jefferies' Philippe Houchois said in a note. While maintaining a Hold rating and a price target of $36, the analyst added, “GM's attempts to position itself as both a growth and income stock have not re-rated multiples, but neither has external pressure.”

Red Flags

The analyst believes General Motors might need to rethink its strategy or that communicate is overdue.

The company’s chief financial officer, Chuck Stevens, is scheduled to hold a call Thursday, which Houchois believes could provide more clarity regarding the guidance and targets, while offering a “valuable opportunity” to get some answers.

The analyst mentioned that the March sales data reflected “persistently high” inventory for General Motors, with 925,000 units at the end of March, which is an increase of 27 units year-on-year as compared to December.

The company’s Detroit peers’ inventory is at around 80, flat year on year.

“Assuming a SAAR (seasonally adjusted annual rate) between 16.5 and 17.5 million units, taking inventory down to the targeted 70 days represents 250,000–275,000 vehicles and a potential c.$1.5 billion contribution shortfall should GM lower production,” Houchois stated.

Given expectations of General Motors’ long term market share of 17.4 percent, the analyst noted that this was also a concern for the industry.

Risk To Expectations

In addition, Houchois expects the company to report its 2017 EPS below the guidance, while stating that there could be risk to the free cash flow guidance as well.

General Motors has raised its buyback target, following the GM Europe transaction, primarily by lowering its gross cash requirement by $2 billion to $18 billion.

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