GM Faces Headwinds as Analysts Caution Investors on Stock's Run-Up

General Motors (GM) has seen a steep run-up in its stock price, but Bernstein analysts are warning investors to proceed with caution. The lead autos analyst, Daniel Roeska, has downgraded the stock to Market Perform from Outperform and cut the price target, citing concerns over the economy, product ramp-up with electric vehicles, and near-term cash needs.

Navigating GM's Challenges: A Comprehensive Outlook

Macro Concerns and Pricing Pressures

Roeska noted that continued inventory build-up in the US will lead to pricing discounts in 2025, impacting profitability. "We assume that discounts will need to increase as inventories are getting pretty high, currently standing at 70 days," he wrote. This macroeconomic trend could pose a significant challenge for GM's financial performance in the coming years.Roeska's analysis suggests that the company may need to offer more aggressive pricing to maintain market share, which could erode profit margins. This is a concern that investors will need to closely monitor as the industry navigates the shifting landscape.

EV Ramp-Up: Challenges and Adjustments

Another area of concern for Bernstein is GM's electric vehicle (EV) ramp-up. The analysts believe that GM's 200,000 EV production target in North America for 2024 is likely beyond reach, and the company would have to quadruple sales in the final four months of the year to hit that goal."We expect the company to further lower its BEV [battery electric vehicle] guidance. As a result, variable profit [revenue minus variable costs] on EVs will be pushed back, and EBIT targets will be delayed to next year at best," Roeska wrote.This adjustment in EV production targets could have a ripple effect on GM's financial projections and investor confidence. The company's ability to execute on its EV strategy will be a crucial factor in determining its long-term success.

Capital Allocation and Shareholder Returns

Roeska and Bernstein are also concerned about GM's rising capital usage and the potential impact on shareholder returns. The analysts are particularly interested in the updates that will be provided at GM's Investor Day (Capital Markets Day) in October."We think there is a risk the company will announce additional capital requirements during its October CMD [Capital Markets Day]. We want to wait and see which updates GM shares," Roeska wrote.The allocation of capital between investments in new technologies, such as EVs and autonomous driving, and the return of capital to shareholders through share buybacks and dividends will be a critical balancing act for GM's management team. Investors will be closely watching for any signals on this front.

Hybrid Strategy and Joint Ventures: Potential Headwinds

In addition to the EV ramp-up and capital allocation concerns, Roeska is also worried about the costs associated with GM's hybrid strategy, including the company's deal with Hyundai to jointly explore developing cars, powertrains, and various technologies."We expect the [hybrid] endeavor to require catch-up capex on hybrid models reducing the FCF [free cash flow] available to return to shareholders," Roeska wrote.The joint venture with Hyundai could require significant capital expenditures, which could impact GM's profitability and the company's ability to return cash to shareholders. This is another factor that investors will need to monitor closely.

Cruise Autonomous Unit: Shouldering the Risk

Another potential issue that may come up at GM's Investor Day is the costs associated with the company's Cruise autonomous unit. Roeska noted that GM is shouldering most of the risk with Cruise since it has no partner, which could put additional strain on the company's resources.The development and deployment of autonomous driving technology is a capital-intensive endeavor, and GM's ability to manage the costs and risks associated with Cruise will be crucial in determining the unit's long-term viability and impact on the company's overall financial performance.In conclusion, while GM's stock has seen a steep run-up, Bernstein analysts are cautioning investors to proceed with caution. The company faces a range of headwinds, including macro concerns, challenges in its EV ramp-up, capital allocation decisions, and potential issues with its hybrid strategy and autonomous driving unit. Investors will need to closely monitor these developments as GM navigates the evolving automotive landscape.