Shares of General Motors (GM) are on the rise after the automaker said it will end production at several North American plants and cut back its salaried workforce by 15%. Commenting on the news, RBC Capital analyst Joseph Spak told investors that he is positive on General Motors' plan to accelerate its transformation with a focus on improving capacity utilization and product development, adding that the initial payback multiple and time frame both look “attractive.” Meanwhile, his peer at Citi added that he was also encouraged by GM announcing a January investor day as he sees "a historic opportunity" for the automaker to put it all together and "potentially unlock billions in value.”
GM ANNOUNCES MAJOR RESTRUCTURING: General Motors announced that it will "accelerate its transformation for the future" by stopping production at five assembly plants in North America in 2019, including one each in Detroit, Ohio, Maryland, Michigan and Ontario, Canada. Additionally, the automaker said it will reduce its salaried workforce by 15%, including a quarter of the company’s executives. The moves are expected to reduce GM’s costs by $4.5B by the end of 2020. In a conference call discussing the plans, Chairman and CEO Mary Barra said GM is taking action while the company and the economy are strong, and noted that the automaker plans to double resources allocated to its electric and autonomous vehicle programs. Commenting on GM's plans to cut salaried and salaried contract staff by 15%, Barra also added that there will be "voluntary and involuntary programs." Reacting to the news, GM workers at its Canadian plant walked off the job. In a tweet, Unifor Canada said that, "Workers decided to walk off the job in protest after learning @GM has no product for them to make after 2019. @UniforLocal222 members feel betrayed. #OshawaMadeGM #canlab."
RBC POSITIVE ON GM’S PLAN: In a research note to investors following the announcement, RBC Capital’s Spak said he is positive on General Motors' plan to accelerate its transformation. While the details are "still scant," the initial payback multiple and time frame both look attractive, he argued. The analyst also noted that GM previously indicated its capital expenditures would be $1B lower by 2021, so the “announcement represents a $500M greater reduction a year earlier.” Given that General Motors sees the announced actions increasing its auto free cash flow run-rate by about $6B by 2020, Spak now sees upside compared to his prior forecast. Spak sees the company's January 11, 2019 analyst day as the stock's next major potential catalyst. He reiterated an Outperform rating on GM shares.
‘UNIQUE TURNAROUND STORY’ EVIDENCED: Also bullish on the news, Citi analyst Itay Michaeli said General Motors' restructuring announcement illustrates the type of "unique turnaround levers" that the company possesses to drive meaningful savings over a relatively short period of time. He sees the reason being that, outside of GM's North American Pickup Truck Franchise, much of GM's domestic auto business operates at "anything but peak." Additionally, the actions are more aggressive than he would have expected, which demonstrates a sense of urgency, Michaeli argued. Further, the analyst told investors that he is also encouraged by GM announcing a January investor day, as he sees "a historic opportunity" for the automaker to put it all together and "potentially unlock billions in value that is long been trapped in various fundamental misconceptions," all the while leveraging recent supportive data points such as Pickup Truck earnings momentum, a leading role in RoboTaxi AVs and “unique turnaround capabilities.” Michaeli reiterated a Buy rating on GM shares.
SUPPLIER IMPACT: Additionally, the Citi analyst highlighted that GM’s capacity cuts serve as another data point evidencing price-discipline. He would expect its sedan production to decline as a result, which could negatively impact some exposed suppliers such as Aptiv (APTV), Magna (MGA) and others. That said, Michaeli thinks signs of a healthier and disciplined auto industry are good for the trading multiples of both automaker and supplier stocks, since prevailing negative sentiment often ties back to irrational behavior from prior cycles.
PRICE ACTION: In afternoon trading, shares of General Motors have gained almost 6% to $38.01.
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