We are raising our GM fair value estimate to $46 after incorporating a major restructuring for GM (GM) North America announced Nov. 26. In our view, the company is wisely staying ahead of the cycle and moving to remove vehicles that are out of favor now that Americans are buying light trucks at a torrid rate. Light trucks constitute nearly 70% of monthly U.S. industry sales, and in GM's case that ratio is about 80%. That ratio is why we think GM stopping production in March and June of 2019 of the Buick LaCrosse, Cadillac CT6, Cadillac XTS, Chevrolet Cruze, Chevrolet Impala, and Chevrolet Volt, all of which we calculate made up just 9.4% of GM's U.S. sales volume year to date (through October), makes sense. GM will stop allocating product to three GMNA plants next year in Oshawa, Ontario, Lordstown in Ohio, and Hamtramck in Detroit. It will also end production at two U.S. transmission plants. As of now, GM is not saying it will close these plants and permanently end production of these vehicles, but we think the CT6 and maybe the Volt will be the only ones to remain in existence, if any, and if kept they would move to a different plant.
Management expects $6 billion of additional free cash flow by the end of 2020, a substantial amount in our view, with $4.5 billion of that from cost reductions and $1.5 billion from capital expenditure reductions as more global vehicle architectures are rolled out. The company seemed hesitant on an analyst call to say if the $6 billion is gross or net, and only said there's puts and takes on that number based on macroeconomic conditions. Multiple times on the call management stressed more detail will be provided around breakeven levels, GMNA operating margin, and sustainable free cash flow generation at a Jan. 11 investor day in New York. The restructuring will entail pretax charges between $3.0 billion and $3.8 billion, and be mostly special items with the majority recorded in the fourth quarter of 2018 and first quarter of 2019.
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David Whiston, CFA, CPA, CFE does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.