General Motors Might Miss Its Margin Target…and It Doesn’t Matter

The folks at JPMorgan aren’t sure General Motors can meet its margin targets–they’re just not sure it matters. Analyst Ryan Brinkman and team explain why the “see attractively deep value” in shares of General Motors:

Getty Images

[For General Motors, we] forecast 2016 EPS of $5.20, well above Bloomberg consensus of $4.82, on volume gains across most regions and a focus on structural costs in North America (we expect North America structural cost opportunity to be a focus of the firm's upcoming analyst day October 1). Our forecast presumes a 2016 North America EBIT margin of 8.8%, +40 bps y/y vs. 8.4% in 2015, which is itself -60 bps vs. an ex-safety recall 9.0% in 2014 that benefits from strong product cadence.

Said differently, we are above consensus without giving much credence to GM’s 10% mid-decade North American EBIT margin goal, suggesting potential additional upside to the extent GM can deliver in this area. Our newly established December 2015 price target of $51 compares to our earlier $50 December 2014 price target. We have conservatively lowered our target multiple to 4.0x from 4.5x, to necessitate less multiple expansion (when we moved to 4.5x, GM was trading closer to 4.0x). We recognize that even our lowered target multiple represents substantial improvement vs. the 2.6x at which we estimate GM is currently trading; however, we feel it is conservatively in keeping with the automaker's historical range of EBITDA despite structural improvement in profitability and a substantially healthier balance sheet. In an upside scenario in which GM can accomplish 10% GMNA EBIT margins or can convincingly demonstrate that it is on a path toward such margins, we feel the stock could be re-rated still higher, potentially even beyond 4.5x.

As a result, Brinkman prefers General Motors to Ford Motor (F) and Tesla Motors (TSLA). He explains why:

We prefer General Motors to Ford (and GM and Ford to Tesla), on lower valuation and stronger near-term profit trend: Ford trades toward the high end of its range of historical valuation (although not above it, like suppliers), while GM trades at a discount. And yet we expect GM to experience strong truck-led profits for the next several quarters as Ford does not, given lost production as it transitions to produce a new aluminum version, even in the event of flawless execution.

Shares of General Motors have fallen 1.4% to $33.45 at 3: 48 a.m., while Ford Motor has dropped 1.5% to $16.40 and Tesla Motors has declined 3.3% to $250.67.