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Undervalued GM's Restructuring Plan a Positive Move

David Whiston, CFA, CPA, CFE

Dave Whiston: GM announced a major restructuring on Monday for its North America segment, or GMNA, where they're going to incur up to $3.8 billion in charges to realize about $6 billion in additional free cash flow generation over the next few years. 

What's notable about this is that it's actually involving three assembly plants are going to not receive product after 2019. This is one in Canada and two in the United States, including plants that make vehicles such as the Chevy Cruze compact sedan, Cadillac XTS, the Chevy Volt, the Cadillac CT6, and the Chevy Impala. All in though, these vehicles are only about 9% of GM sales year to date through October. What the company is doing is basically concentrating on where it makes money and what's in demand. 

Light truck models, which are pickups, crossovers, SUVs--those are nearly about 70% of all new vehicle sales every month in the United States, and for GM, that ratio is actually closer to 80%. GM's focusing on where it can really make the most of its money and also invest for the future. They're going to be doubling resources toward EVs and AVs as well. It's going to be painful in the short term, we're looking at about $2 billion in cash restructuring charges, which they're going take on a small credit line to fund, but they think the payback period for this will be under a year. 

Longer term GM, in my opinion, is a very undervalued stock and will remain so, and so what they've been working to do is just get better in the core business, get better in realizing the economies of scale that an automaker GM's size should have. I think this is a positive move in that direction. 

I should stress, though, that we don't really know the fate of these vehicles, in that they did not come out and say these plants will be closed. They just said product will be unallocated after 2019, so we don't know for sure if these vehicles are going away forever, or if some will reappear, perhaps in a different plant. For now, GM I think wants to be flexible and probably wants a little bargaining chip for the upcoming UAW-CBA talks this summer. It just remains to be seen what's going to happen. I would expect these plants are probably going to close, and most of these vehicles do go away. The one exception might be something like the Chevy Volt or perhaps the Cadillac CT6.