Company Reports

The US on May 13, 2024, announced a series of new tariffs on Chinese imports. These include a 100% tariff on electric vehicles and a 25% tariff on lithium-ion batteries and battery parts. There was also a 25% tariff on critical minerals, which include graphite, permanent magnets, and cobalt.

GM started 2024 with good first-quarter results and raised 2024 EPS and adjusted EBIT guidance, giving us no reason to change our $84 fair value estimate. Adjusted diluted EPS of $2.62 rose 18.6% year over year (9.8% excluding buybacks) and beat the LSEG consensus of $2.15. EPS is now guided at $9.00-$10.00, up from $8.50-$9.50, as good demand expectations; cost cutting efforts; and the fact pricing didn't fall as much as planned in the quarter led to a $500 million increase on both ends of adjusted EBIT guidance to $12.5 billion-$14.5 billion. We've never believed falling prices from chip-shortage-induced high levels would mean poor 2024 results because we expected benefits from higher US volumes as the industry heals from the chip shortage. Total adjusted EBIT rose by 1.8% year over year as a $200 million pricing headwind and a $500 million mix headwind on fewer trucks and more electric vehicles was offset by a $700 million volume tailwind. GM North America's $900 million volume benefit offset $200 million in lower GM International volume. GM's ongoing $2 billion cost reduction plan for 2024 contributed $200 million and helped offset higher labor costs in the new United Auto Workers union contract.

Higher inventories and more discounting continue to bring consumers back to showrooms this year, with March US light-vehicle sales up by 4.6% year over year. Wards put the seasonally adjusted annualized selling rate at 15.49 million, up from 14.93 million in March 2023. The chip shortage is mainly behind the industry, so inventories are at their highest levels since early 2021, which, in turn, is bringing incentives off ultralow levels as a percentage of the average transaction price. Per Cox Automotive, incentives have recently trended at nearly 6% of ATP, about double the rate in early 2023 but still far below prepandemic levels in the low teens. We expect continued inventory growth and higher incentives, which, combined with a possible interest rate cut or cuts this year, may fuel higher demand.

We see General Motors with a competitive lineup in all segments it competes in, combined with a reduced cost base ($2 billion more in cuts across 2023-24), finally enabling it to have the scale to match its size. We think GM's earnings potential is excellent because the company has a healthy North American unit and a nearly mature finance arm with GM Financial. Moving hourly workers' retiree healthcare to a separate fund and closing plants drastically lowered GM North America's breakeven point to U.S. industry sales of about 10 million-11 million vehicles, assuming 18%-19% share. We expect more scale to come from GM moving its production onto vehicle sets over the next few years and a joint venture making EV batteries for even more flexibility and scale.

GM finished 2023 with a good fourth quarter—hindered by nearly $1 billion in UAW strike costs—and introduced 2024 guidance that suggests a good year ahead. We are not changing our fair value estimate but will reassess all modeling inputs while rolling our model for the 10-K. Fourth-quarter adjusted diluted EPS of $1.24 fell 41.5% year over year but beat the $1.16 Refinitiv consensus. Adjusted EBIT of $1.8 billion fell by 53.8%, and EBIT margin declined by 470 basis points to 4.1%. Adjusted auto free cash flow of $1.3 billion fell by 70% but still left GM with automotive cash and securities of $19.8 billion.

Most automakers reported final sales numbers for 2023 on Jan. 3. Adjusting for one selling day fewer, Wards put the year-over-year December sales increase at 17.3% and the seasonally adjusted annualized selling rate at 15.83 million, up from 13.55 million in December 2022. Full-year sales increased 12.4% to 15.46 million. We think the worst of the chip shortage is finally behind the industry, but we expect some supply shortages in 2024. As inventory continues to recover, we expect incentives as a percentage of average transaction price to keep rising from artificially low levels of barely above 2% in late 2022 (currently just over 5%), which will pressure automaker and dealer margins in 2024 relative to the past two years. Better inventory and U.S. interest rates likely done rising should bring some consumers back to the showroom. Affordability remains a challenge though, so we expect only a small increase in 2024 light-vehicle sales to the high 15 million range.

GM’s roughly 46,000 United Auto Workers members recently ratified a new contract that expires on April 30, 2028. See our Oct. 30 note for key details of the new deal. The union’s vote tracker shows about 54.7% yes votes with production workers voting 53.2% yes and skilled trades 63.8% yes. The vote was closer than we expected, with only four of GM’s 11 U.S. assembly plants approving the deal, and we calculate 78.2% voter participation. The higher dissatisfaction among GM production workers likely came from a combination of UAW President Shawn Fain setting expectations too high around resuming pension and GM-paid retiree healthcare and the union putting economic gains over the deal for the most senior production workers at $68,700, while in progression, temporary workers, and those in other areas such as parts distribution or materials handling have gains ranging between $134,600 and $198,800. These gains exclude overtime and profit sharing.

We see General Motors with a competitive lineup in all segments it competes in, combined with a reduced cost base, finally enabling it to have the scale to match its size. We think GM's earnings potential is excellent because the company has a healthy North American unit and a nearly mature finance arm with GM Financial. Moving hourly workers' retiree healthcare to a separate fund and closing plants drastically lowered GM North America's breakeven point to U.S. industry sales of about 10 million-11 million vehicles, assuming 18%-19% share. We expect more scale to come from GM moving its production onto vehicle sets over the next few years and a joint venture making EV batteries for even more flexibility and scale.

On Oct. 30, the United Auto Workers union announced that it had reached a tentative contract with GM. The deal is not effective until ratified by a majority vote of GM’s approximately 46,000 UAW workers. UAW’s GM national council will meet in Detroit to vote on sending the contract to all members. There will then be local chapter meetings to discuss the deal and eventually, a vote will be done over a few weeks. The contract looks mostly similar to Ford and Stellantis’ tentative deals. The union has instructed GM workers to return to work during the ratification process. The strike started on Sept. 15. We expect the deal to be ratified.

The United Auto Workers union announced the night of Oct. 25 that it reached a tentative new 4.5-year contract with Ford. The deal is not effective until ratified by a majority vote of Ford’s approximately 57,000 UAW workers. UAW’s Ford national council will meet in Detroit on Oct. 29 to vote on sending the contract to all members. If they vote to do so, the union that night will host a live video to give members details and release summary literature. There will then be local chapter meetings to discuss the deal and eventually a vote. The union has instructed Ford workers to return to work during the voting process to pressure GM and Stellantis to make a deal. The strike started at all three firms on Sept. 15. We expect the deal to be ratified.

GM had a good third quarter, despite about a $200 million adjusted EBIT loss from the United Auto Workers strike and adjusted diluted EPS of $2.28 beat the $1.88 Refinitiv consensus. We are leaving our fair value estimate unchanged, but reducing our 2023 adjusted EBIT by $4.77 billion to estimate the impact of the UAW strike lasting the rest of the year and continuing to increase in magnitude during the fourth quarter. This change reduces our 2023 EPS by about 35%. We are not surprised management withdrew 2023 guidance, as estimating the duration and magnitude of the strike when not all plants are on strike makes giving guidance practically impossible. GM said the strike is costing it $200 million a week in EBIT. However, immediately after GM's earnings call, the UAW called a strike at GM's sole full-size SUV plant in Arlington, Texas. We estimate Arlington contributes slightly over $5 billion in annual EBIT, so the impact of this plant for the rest of 2023, plus $2.4 billion for fourth-quarter impact excluding Arlington, and $200 million for third-quarter strike loss is the basis for our $4.77 billion estimate. We expect more strikes before a deal is reached and we expect the union to next hit GM's heavy-duty pickup truck plant in Flint, Michigan, or light-duty full-size pickup production in Roanoke, Indiana.

The United Auto Workers' strike against GM, Ford, and Stellantis is a month old and the union escalated the strike on Oct. 11 by striking at Ford’s Kentucky truck plant. This plant is the first severe wound inflicted because the UAW is now hitting full-size SUV and pickup truck plants, the most profitable vehicles. Per Ford, the Kentucky truck plant generates $25 billion in annual revenue contributing, by our estimate, roughly $5 billion in operating profit, mostly making Super Duty pickups but also the Expedition and Navigator SUVs. We expect GM’s only SUV plant, which is in Arlington, Texas, and Stellantis’ Warren, Michigan plant that makes the Grand Wagoneer to be on strike any day. We’ve read predictions that striking the most lucrative vehicles will cause the strike to end soon, but we don’t think that will happen unless the automakers are willing to give in to further wage increases above the as-much-as 23% already offered and also to capitulate on reopening pensions and retiree healthcare to current workers, something we don’t think the firms can afford. The union is not happy with Ford’s offer, but Ford said at an Oct. 12 press conference that its offer has reached the limit of what it can do without hurting its ability to reinvest in the business. That doesn’t sound like a strike that is about to end.

The Canadian union Unifor announced on Oct. 10 that it has reached a tentative agreement with General Motors. The GM Canada strike started earlier on Oct. 10 is stopping so members can vote on the agreement that we expect will take about a week as members need to be educated on the deal. This contract covers about 4,300 workers across three facilities: the Oshawa assembly plant that makes light duty and heavy duty Silverado pickups, the Woodstock parts distribution center, and the St. Catharines engine and transmission plant. Unifor in a press release said GM is matching the pattern agreement ratified by Ford members on Sept. 24, which includes base wage increases for production workers of 20% over the contract’s three years to CAD 44.52 an hour, plus another CAD 1.61 an hour cost of living increase, retirement benefit increases, halving the time to get to the maximum hourly wage to four years, and moving all workers on a defined contribution plan and new hires to a “Defined Benefits style pension” on Jan. 1, 2025. We speculate this may be some type of hybrid pension plan rather than a resumption of a traditional defined benefit plan that GM closed to hourly Canadian workers in October 2016. The contract also has a CAD 10,000 ratification bonus and a CAD 4,000 bonus for part time temporary workers. We are not changing our fair value estimate until we see the valuation impact, if any, of the United Auto Workers strike.

Canadian union Unifor called a strike against GM Canada starting Oct. 10 after the sides could not reach a new contract for about 4,300 workers across three facilities. This walkout is for the master agreement for the Oshawa assembly plant, which makes light-duty and heavy-duty Silverado pickups, the Woodstock parts distribution center, and the St. Catharines engine and transmission plant. St. Catharines is the nonexclusive engine provider for various vehicles such as Texas SUV production, Silverado production across North America, Kentucky Corvette production, and powertrains for the Equinox crossover. The CAMI plant in Ingersoll, which makes the BrightDrop electric delivery van, is part of a different contract that had its own strike in 2017. The master agreement group has not struck GM since a three-week action in 1996.

Most automakers reported third-quarter or September U.S. auto sales on Oct. 3 with Wards putting the month’s deliveries to end customers up 18.5% from September 2022, or 13.9% after factoring in one more selling day this September. Third-quarter deliveries grew by 16.8%. The month’s seasonally adjusted annualized selling rate was 15.67 million up from 13.70 million a year ago. J.D. Power estimated September incentives per unit at $1,806 which is 81% higher year over year but off a very low base as poor supply from the chip shortage made discounting a low priority. Incentives as a percentage of average manufacturer's suggested retail price are only 3.7%—quite low in absolute level terms, even though it’s up 160 basis points year over year. Demand remains robust as consumers realize pent-up demand from the start of the pandemic. The UAW strike will not help fourth-quarter numbers and the Detroit Three entered September with about 40% less dealer inventory than just before the 40-day GM strike four years ago. However, the strike is hitting certain vehicles rather than all plants at once and as of Oct. 3 has not affected full-size pickups or full-size SUV production.

In an Aug. 25 note, we said Stellantis is the most likely automaker to suffer a UAW strike when the union’s contracts with each of the Detroit Three end at 11:59 PM Eastern time on Sept. 14. Since that time, UAW president Shawn Fain has said the union will strike any automaker that it does not have a new agreement with. The sides remain far apart on every key issue, so we now expect a strike against all three firms simultaneously (which has not happened previously), starting on Sept. 15. We see 2023 earnings guidance in jeopardy, but we will likely keep our fair value estimates in place until we know what a new contract looks like. We expect a strike to potentially last several months due to the large gap between the UAW’s desired wage increase and the low-double-digit percentage increases already offered, as well as due to the union wanting to reinstate bygone benefits such as pensions, retiree healthcare, and a 32-hour workweek that would force the automakers to hire more workers than it needs.

In 2022, battery electric vehicles represented nearly 10% of global auto sales, up from a little less than 6% in 2021. Much of the growth occurred in China, which has been a leader in EV sales over the past decade. However, with national EV subsidies in China expiring in 2022 and far lower sales in the U.S. and Europe, the market questions if EV sales can continue to grow without subsides.

On Aug. 25, the United Auto Workers announced 97% member approval of strike authorization against General Motors, Ford, and Stellantis, affecting almost 150,000 hourly workers. This vote does not guarantee a strike will happen; it’s procedural and done every negotiation so the UAW can immediately strike if it chooses to once its contract with each firm expires at 11:59 p.m. Eastern time on Sept. 14. We continue to think a strike against Stellantis is the most likely outcome, but UAW president Shawn Fain has made it clear that a simultaneous strike against all three firms is possible. This has never occurred.

It is disappointing to see GM’s stock fall by over 4% on July 25 after reporting what we see as good second-quarter results where adjusted automotive free cash flow nearly quadrupled year over year to $5.5 billion. We are not changing our fair value estimate because GM is delivering on what it said it would do while also generating respectable free cash flow. We think the stock may be down on fears of a possible UAW strike this fall and perhaps frustration with the slow rollout of GM’s battery electric vehicles, but GM’s BEV production should accelerate as GMC Hummer production rises this year and GM resolves a problem with an automation equipment supplier at the Ultium Cells joint venture plant in Ohio. GM also said it is no longer discontinuing the Bolt and will instead add Ultium batteries to it—but not until 2024. About 70% of Bolt buyers are new to GM.

Throughout the week of July 3, automakers have reported June or second-quarter sales. Wards has June sales up 19.9% year over year and the month’s seasonally adjusted annualized selling rate at 15.68 million, up from 13.05 million in June 2022. J.D. Power said on June 23 that the month’s incentives were tracking to rise 95.9% from June 2022, but that is off a low base of $918 per vehicle. With J.D. Power putting incentives as a percentage of average transaction price at only 3.7%, we don’t see sales reliant on discounting, plus the most expensive trim packages continue to be in demand. We expect third-quarter demand to remain healthy amid continued pandemic and chip shortage recovery. Inventory continues its slow recovery from the chip shortage with end of May stock at 1.81 million well below prepandemic levels of mid-3 million to low-4 million units.