GM Tapping Most of Its Credit Lines Is Prudent
We are not changing our fair value estimate for the no-moat firm.
GM (GM) announced on March 24 that it is suspending its 2020 guidance of adjusted diluted EPS between $5.75-$6.25 and adjusted automotive free cash flow, which excludes the Cruise autonomous ride hailing business, of $6.0 billion-$7.5 billion. GM also announced it is drawing approximately $16.0 billion of the $17.3 billion available from its automotive credit lines. This should give GM about $30 billion-$31 billion of cash at March 31 because it estimates the $16 billion will supplement $15 billion-$16 billion of cash at month end. GM Financial will still pay the auto business $800 million in 2020 as guided on Feb. 5 and that $400 million of that amount occurred in first quarter.
There was no mention of the dividend (about a $2.17 billion annual payout) on March 24, and we think GM is trying to keep it. However if plant shutdowns continue well into April, we think GM may have to follow Ford and suspend its dividend. GM normally declares its second-quarter dividend in late April, so we don’t expect to hear any news until then. The problem for GM, as for many firms, is management likely has no visibility yet as to what degree automotive demand rebounds nor how long statewide stay-at-home mandates in America to fight the coronavirus will last.
We are not changing our fair value estimate until we have more visibility on demand and word on will the U.S. government implement an auto subsidy program like Cash for Clunkers in summer 2009. We continue to see GM as a very cheap stock but one with high uncertainty and volatility. Even if 2020 U.S. auto sales come in below 11 million units this year (which would be depression-like) to say 10.8 million, we would likely only reduce our fair value estimate into the low $40s because we would not model 2020 sales as a midcycle level. GM North American plants must restart as soon as possible. As we wrote in our March 18 note, we estimate every day GMNA is shutdown costs GM about $92.9 million in net income, or $0.06 of EPS.
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Richard Hilgert does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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