Zacks Investment Research



|General Motors Co. |(GM – NYSE) |$36.20 |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 1Q18 Earnings Update.

Prev. Ed.: Flash Update; Apr 26, 2018.

Brokers’ Recommendations: Positive: 60% (9 firms); Neutral: 40% (6); Negative: 0% (0) Prev. Ed: 8; 7; 0

Brokers’ Target Price: $51.25 (↑$1.48 from the last edition; 12 firms) Brokers’ Avg. Expected Return: 41.6%

Portfolio Manager Executive Summary

General Motors Company (General Motors or the company) is a leading automobile manufacturer in the world by sales volume. Due to unfavorable economic conditions and a rapid decline in sales, the company filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States. Bankruptcy Court on Jun 1, 2009. Pursuant to this, the New GM was formed by substantially acquiring all of the assets and assuming certain liabilities of the Old GM, and some of its direct and indirect subsidiaries.

Firms’ Opinion: Of 15 firms in the Digest Group covering the stock, nine provided positive while six assigned neutral ratings. Of the 15, 12 firms provided target prices.

Positive or equivalent outlook (9/15 or 60%) — The firms issuing a bullish view on General Motors expect the company to benefit from its investments in new technologies and engineering. Like other automakers, it is also focusing on developing electric and self-driving cars. In 2018, it plans to invest roughly $1.1 billion in mobility-oriented initiatives. These initiatives are going to help General Motors to remain competitive with its peers. Also, in order to tackle difficult market conditions, the company is restructuring Korea operations with a plant closure in May. This is going to drive the performance of company’s GMI segment. Moreover, the company is trying to enhance its brand value and for which, it has also set a goal of reducing $8.5 billion in its cost efficiencies by the end of 2018. The firms further anticipate that General Motors’ focus on capital deployment will lead to share repurchases, thus boosting the shareholders’ value.

Neutral or equivalent outlook (6/15 or 40%) — These firms believe that the company has emerged from bankruptcy with a stronger financial position and a low-cost structure. Increased investments in new-vehicle technologies might widen the company’s expenses. However, these pressures might offset by elevated global demand and production efficiencies. In 1Q18, General Motors gained from the strong demand for trucks and SUVs in North America. But a similar trend is unlikely to continue in the future. Unfavorable interest rates and pricing competition for used vehicles might result in a moderate demand in North America. Also, negative trade policies and frequent vehicle recalls could lead to declining demand while pressurizing the company’s profits. Also, an under-funded pension plan poses a challenge to the company.

May 2, 2018

Overview

Detroit, MI-based General Motors is a leading automobile manufacturer in the world. The company, along with strategic partners, produces, sells and services cars, trucks and parts under four core brands — Chevrolet, Buick, GMC and Cadillac. Additionally, General Motors provides automotive financing services through its subsidiary, General Motors Financial Company, Inc., which buys automobile finance contracts for new and used vehicles purchased by consumers, primarily from franchised and select independent dealerships.

GM has three operating segments namely General Motors North America (GMNA) (77.2% of total revenues in 1Q18), General Motors International (“GMI”) (13.4%) and GM Financial (9.4%). The company discontinued its European Business operation, which was reported as General Motors Europe (“GME”).

Also, at the end of 4Q17, the company combined its GM South America (GMSA) and GM International Operations (GMIO) operating segments into one i.e. GMI. The segment merger was done to modify its organizational structure after the sale of Opel/Vauxhall Business on Aug 1, 2017.

Further information is available at: .

Key investment considerations as identified by research firms are as follows:

|Key Positive Arguments |Key Negative Arguments |

|The company is focusing on the emerging markets, particularly Brazil |The auto industry is sensitive to shifts in the business cycle and overall |

|and China to recoup its global sales by increasing capacity investment |economic activity. |

|to meet growing demand. |General Motors faces strong competition from major foreign and domestic |

|The company expects to benefit from developing and launching electric |manufacturers, such as Ford Motor Company, Toyota Motor Corporation, Honda |

|and self-driving cars. |Motor Co., and Nissan Motor Co. |

|General Motors is focused on investment in innovative technologies and |The company has been facing frequent vehicle recalls, primarily due to safety|

|vehicles, which should provide sustained growth while maximizing |issues. Consequently, the company is facing multiple investigations and |

|shareholders’ value. |lawsuits. |

| |Rising interest rates might lead to lead to moderate sales in the company’s |

| |North American segment. |

NOTE: The company’s fiscal references coincide with the calendar year.

May 2, 2018

Long-Term Growth

The global automotive industry is a highly diversified sector comprising manufacturers, suppliers, dealers, retailers, original equipment manufacturers, aftermarket parts manufacturers, automotive engineers, motor mechanics, auto electricians, spray painters or body repairers, fuel producers, environmental and transport safety groups and trade unions. Also, the auto sector is considered to be both capital and labor intensive, plus highly competitive and cyclical. Thus, an unexpected swing of industry conditions could lead to a material change in profit expectations.

General Motors’ strategy to generate profitable growth is focused on four targets: creating a long-lasting customer base, concentrating on using state-of-the-art technology and innovation, expanding brands globally and driving core efficiencies.

For FY18, the company expects that its performance will be driven by its strengthening presence in the North American and Chinese markets as well as an improvement in the South American market. Also, its enhanced growth of other businesses including GM Financial and its continuous cost efficiencies is likely to contribute to its 2018 financials.

Additionally, General Motors estimates higher profits in 2019 based on its assumption, driven by a line-up of high-margin pickup trucks. Moreover, its assembly of SUVs, low-cost cars for international markets and the Cadillac brand are expected to perk up its future income.

The company is focused on sustainable growth with a target of $8.5 billion set in cost savings by 2018. Of the total expenses in 2018, $1 billion will be used for developing self-driving car technology. Also, it will be ramping up its investments in electric vehicles but the stipulated funding amount has not been disclosed yet.

The automaker is working toward restoring Cadillac as an iconic luxury brand, expecting the brand’s portfolio to cover 90% of its luxury segment’s volume by 2020 compared with 50% at present.

The company expects half of the global sales growth by 2030 to come from emerging markets. It is trying to gain via product launches and the new Wuling plant. In January 2017, General Motors announced plans to launch 20 new and refreshed vehicles in China and 60 models through 2020. Further, it will launch at least 20 all-electric vehicles by 2023 in the country. In March 2017, the company announced plans to invest in a battery assembly plant in Shanghai. This plant will help it to locally produce battery packs for new energy vehicles. GM proposes to improve margins in China through efficient cost management, continued investment in Cadillac, the roll-out of OnStar communications, its in-car safety system, and launch of the new SUVs. The Chinese market is expected to become the world’s largest luxury vehicle market later this decade. It is expected that SUVs and MPVs will contribute 40% to the company’s sales growth in this market. The company’s joint ventures in China will invest $14 billion through 2018 to open five vehicle-manufacturing plants and increase vehicle sales volumes by nearly 40%. The automaker plans to boost annual production capacity in China by 65% by 2020. In 2107, its joint venture in China announced an investment of $16.14 billion to develop at least 10 all-new or updated models for the Chinese market each year through 2020.

In March 2015, General Motors adopted a comprehensive capital allocation strategy per which it intends to return its available free cash flow to shareholders while maintaining an investment-grade balance sheet and a cash balance of $20 billion to boost long-term growth. As part of this strategy, General Motors announced an initial share repurchase of $5 billion. In January 2016, the company increased its share repurchase authorization by $4 billion to $9 billion, which was further increased by $5 billion to $14 billion in January 2017. In fiscal 2016, the company purchased shares for $2.5 billion and paid dividends of $2.3 billion. Further, in fiscal 2017, the company spent a total of $2.23 million as cash dividends and $4.5 billion in order to repurchase shares. In the first quarter of fiscal 2017, the company hiked its regular dividend by 6% from the first quarter of 2016. There after the company kept the dividend unchanged.

General Motors believes that the continued enforcement of its strategic plan will help it to achieve adjusted earnings before interest and tax (EBIT) margin of 9–10% by early next decade. To achieve this target, the company needs to drive sustained growth in its core business in addition to focusing on several other initiatives. The automaker strives to excel in its products and technology, expand the Chevrolet and Cadillac brands globally, grow its presence in China and boost the results of the GM Financial segment.

The company believes that by strengthening its core business and laying the foundation to lead in the transformation of personal mobility, it will create value for customers, which in turn will be beneficial for the company.

General Motors is also restructuring its international businesses to concentrate on the core business. On Jul 31, 2017, the company sold its Opel/Vauxhall subsidiary and GM Financial’s European operations to PSA Group. Further, at the end of 4Q17, it merged its GM South America (GMSA) and GM International Operations (GMIO) operating segments into one i.e. GMI.

Further, the company stopped selling Chevrolet in the Indian and South African markets by the end of 2017. However, it will continue its manufacturing operations in the region. This initiative is aimed to help generate cash and focus on more profitable markets. The company proposed to lower production at GM Korea facilities in 2018 to tackle difficult market and operating conditions. The proposal includes an investment of $750 million by the Korea Development Bank (KDB), one of the minority owners of GM Korea.

May 2, 2018

Target Price/Valuation

Provided below is a summary of target price/valuation as compiled by Zacks Digest:

|Rating Distribution |

|Positive |60%↑ |

|Neutral |40%↓ |

|Negative |0% |

|Avg. Target Price |$51.25 ↑ |

|Digest High |$70 |

|Digest Low |$39↑ |

|No. of Analysts with Target Price/Total |12↓/15 |

Risks to the target prices include disappointments in the international market, volatility in the prices of oil, strong competition around the world, shortage of parts due to untimely supply by the parts suppliers and under-funded pension plan obligations.

May 2, 2018

Recent Events

On Apr 26, 2018, General Motors posted adjusted earnings per share of $1.43 in 1Q18, surpassing the Zacks Consensus Estimate of $1.22. Moreover, adjusted earnings were down 18.3% from the 1Q17 figure.

Revenues

General Motors’ net revenues were at $36.1 billion in 1Q18, 3.1% lower than $37.3 billion recorded in 1Q17. However, the top line surpassed the Zacks Consensus Estimate of $34.1 billion.

Worldwide wholesale-unit sales declined to 1.16 million vehicles from 1.24 million in 1Q17. Worldwide retail-unit sales moved down to 2.1 million vehicles from 2.34 million in 1Q17. The automakers’ global market share was 11.4% during the reported quarter, lower than 11.6% in 1Q17.

Automotive sales and revenues were $32.7 billion in 1Q18 from $34.7 billion recorded in 1Q17.

Segment Revenues

GMNA: Revenues decreased 5.5% to $27.8 billion in 1Q18. Retail sales rose to 827,000 units from 816,000 in the prior-year quarter. Wholesale sales came down to 893,000 units from 940,000 in the prior-year quarter.

GMI: Revenues declined 6% to $4.8 billion. Wholesale volumes dipped to 266,000 units compared with 299,000 in 1Q17.

GM Financial: Revenues jumped to $3.4 billion in 1Q18 from $2.7 billion in 1Q17.

Outlook

General Motors expects FY18 revenues to be in line with the amount generated in FY17. The automaker is likely to benefit from its strengthening presence in the North American and Chinese markets as well as an improvement in the South American market. Also, its enhanced growth of other businesses including GM Financial and its continuous cost efficiencies might contribute to its 2018 financials. However, in 2018, the company anticipates a 5-6% decline in used-vehicle prices in the United States, primarily due to rise in off-lease returns which is likely to continue through 2019.

Further, General Motors believes that the uptrend achieved in 2017 will possibly continue and further pick up the momentum to fortify in 2018 as well as in 2019. Also, new product introductions are anticipated to drive its sales volume.

The bullish firms believe that widening new product lines will benefit General Motors. Also, the launching of electric and self-autonomous cars will contribute to General Motors’ rise in revenues.

The cautious firms believe that rising interest rates might hamper sales of General Motors in North America. However, new product launches, expansion in global automotive markets and a continued focus on the emerging markets will benefit the company’s results.

Margins

Adjusted EBIT increased to $2.6 billion in 1Q18 from $3.6 billion in 1Q17.

Adjusted return on invested capital (ROIC) at the end of 1Q18 was 26% compared with 31.1% at the end of 1Q17.

Segment Details

GMNA: Adjusted EBIT from continuing operations decreased to $2.2 billion in 1Q18 from $3.5 billion in 1Q17.

GMI: Adjusted EBIT from continuing operations was $200 million, which was similar to 1Q17.

GM Financial: Adjusted EBIT from continuing operations was $400 million, up from $200 million recorded in 1Q17.

Outlook

General Motors expects adjusted EBIT and EBIT margin to remain stable in comparison with 2017. Additionally, the company estimates higher profits in 2019, driven by a line-up of high-margin pickup trucks. Also, its focus to decrease capital expenses should drive its bottom line.

The bullish firms believe that the company will benefit from new model launches and higher profit from its operations in international markets. The firms are also of the view that higher pricing and better mix due to stronger sales of trucks and SUVs will enhance margins in North America.

The cautious firms expect General Motors’ restructuring measures like reducing debt, increasing domestic brands and downsizing workforce to boost margins. However, the firms are concerned about under-funded pension plans and retirement-related obligations. Also, the charges incurred due to late recalls along with the cost of repairing the recalled vehicles will considerably dent profit margins of the company.

Earnings per Share

General Motors posted adjusted earnings per share of $1.43 in 1Q18, surpassing the Zacks Consensus Estimate of $1.22. Moreover, adjusted earnings were down 18.3% from the 1Q17 figure.

Net income from continuing operations (as reported) amounted to $1.1 billion in 1Q18 against net income of $2.8 billion in 1Q17.

Outlook

For FY18, General Motors expects earnings per share almost in line with that of FY17.

The bullish firms expect product launches and higher margins to boost earnings. They expect General Motors to focus on capital deployment, leading to dividend hikes and share repurchases. Share buybacks will boost the company’s earnings per share in the future.

Some of the cautious firms foresee strong competition, challenging market situations and under-funded pension liabilities as factors that will affect the company’s earnings. Other firms opine that share repurchase will aid the company’s bottom line.

|Analyst |Gargi Dam Kanunjna |

|Copy Editor |Sreya Mukherjee |

|Content Ed. |Sanjoy De |

|Lead Analyst |Sanjoy De |

|QCA |Anindya Barman |

|No. of brokers reported/Total |12/15 |

|brokers | |

|Reason for Update |1Q18 Earnings Update |

May 2, 2018

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May 2, 2018

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