General Motors (GM, Financial) went into the last recession as a bloated, inefficient, indebted and rudderless shell. Reforged in the crucible of bankruptcy, the GM that came out the other side was a very different breed of automaker.
Unshackled from legacy obligations and freed to look forward rather than backward, GM has seized the opportunity with both hands. Mary Barra, CEO since 2014, has shown an intense commitment to carrying GM into the future with strong finances and leading-edge technology.
While Barra has been able to enjoy the long bull market and years of economic growth, she has never allowed the memories of 2008 and financial crisis that brought one of America’s last great manufacturers to the brink of annihilation. As steel tariffs bite into the auto industry and signs of a slowdown begin to multiply, it is a welcome sign that GM is ready for whatever is to come.
On November 26, GM released a new transformation plan that will, the company claims, “accelerate" its transformation for the future, building on the comprehensive strategy it laid out in 2015 to strengthen its core business, capitalize on the future of personal mobility and drive significant cost efficiencies.
Let’s take a look at GM’s new strategy document and what it might mean for the company (and stock) going forward.
Cleaning house before the next crisis hits
The auto sector has been quite anemic in recent months, something considered to be a leading indicator of broader market issues. Last time around, GM was caught flat-footed and unprepared. The result was an ignominious bankruptcy. This time, GM is taking steps to reduce costs and redundant staff while embracing efficiencies that will materially improve the company’s bottom line:
“Today, GM is continuing to take proactive steps to improve overall business performance including the reorganization of its global product development staffs, the realignment of its manufacturing capacity and a reduction of salaried workforce. These actions are expected to increase annual adjusted automotive free cash flow by $6 billion by year-end 2020 on a run-rate basis...Contributing to the cash savings of approximately $6 billion are cost reductions of $4.5 billion and a lower capital expenditure annual run rate of almost $1.5 billion.”
GM has learned from the mistakes of the past. It knows bloat and inefficiency can wound an automaker in good market conditions; when the economy turns for the worse, they are absolutely lethal. Proactive action to reduce costs and improve free cash flow over the next two years represents a laudable goal for GM to pursue in earnest. Shuttering inefficient plants and ending low-return vehicles, as GM has announced it is already doing, is a good start.
Investing in next-generation technology
Another big theme of GM’s transformation strategy is a redoubled commitment to advancing the next generation of automotive technology. The document gives special mention to electric vehicle development and commercialization, as well as autonomous driving technology:
“GM is evolving its global product development workforce and processes to drive world-class levels of engineering in advanced technologies, and to improve quality and speed to market. Resources allocated to electric and autonomous vehicle programs will double in the next two years...GM now intends to prioritize future vehicle investments in its next-generation battery-electric architectures.”
GM is making a big play in the EV space. The Chevrolet Bolt has been on the market for a little while, but has hardly set the world on fire. That said, it has proven to be a solid product and serves as a decent blueprint for GM going forward. GM is going to be investing big in EVs and will be helping transition the auto industry to electric en masse in the years ahead.
In other technologies, GM has already demonstrated significant leadership. This is especially true of autonomous driving technology. GM’s autonomous program is one of the most sophisticated out there, with only Waymo, a subsidiary of Alphabet Inc. (GOOG), potentially ahead in development. With further deep investment planned, GM appears well placed to maintain its position in the vanguard of autonomy.
The inevitable costs of restructuring
Nothing is free, even when we are cutting costs and increasing efficiency. Such is the case with GM as it seeks to undertake this ambitious transformation:
“GM expects to fund the restructuring costs through a new credit facility that will further improve the company’s strong liquidity position and enhance its financial flexibility.
“GM expects to record pre-tax charges of $3.0 billion to $3.8 billion related to these actions, including up to $1.8 billion of non-cash accelerated asset write-downs and pension charges, and up to $2.0 billion of employee-related and other cash-based expenses. The majority of these charges will be considered special for EBIT-adjusted, EPS diluted-adjusted and adjusted automotive free cash flow purposes. The majority of these charges will be incurred in the fourth quarter of 2018 and first quarter of 2019, with some additional costs incurred through the remainder of 2019.”
GM admits restructuring will not be cheap, but they are undoubtedly worth it.
Verdict
What can we make of GM’s transformation strategy?
Well, it is only just getting started, so it is hard to say how it will all shake out. But, if the company does what it says it will, then it should prove a winning strategy in the years ahead. The market certainly seems to like what it is seeing, sending shares climbing on Nov. 26 in the wake of the release of the strategy document.
CEO Mary Barra summed up the aims of the transformation plan very effectively:
“These actions will increase the long-term profit and cash generation potential of the company and improve resilience through the cycle.”
Whether GM is a buy at this point is another question. There are growing signs of a looming cyclic downturn in the auto industry, and perhaps in the broader economy. Auto stocks, even very well-managed ones, are cyclical businesses. GM has seen considerable share price appreciation in recent years. It might well prove a cheaper buy once the next downturn starts to bite. The company should weather that storm when it comes.
Ultimately, GM is a stock worth owning. Whether right now is the best time to enter is not so certain. So we would call it a strong hold.
Disclosure: No positions.
