On Tuesday, Morgan Stanley lead auto analyst Adam Jonas dropped his price target on General Motors to $US27 per share from $US29.
From his note to accompany the downgrade:
We believe many elements from Ford’s recent profit warning are applicable to GM’s outlook through 2015 and beyond. At its investor day, GM understandably focused its attention on reestablishing cultural and strategic momentum.They didn’t warn, so we’re doing it for them.
Jonas is staking out some territory here. Other analysts saw GM’s investor presentation last week differently. Citi’s Itay Michaeli called it a “defining moment” for sentiment about GM’s stock performance, which has been unremarkable in 2014.
Jonas, on the other hand, doesn’t think GM is operating in a separate world from Ford, which saw its stock plunge last week after admitting to Wall Street that the company will lose billions this year in Latin America and Europe (the latter due to problems with the Russian economy).
“Ford’s reduced outlook was based on increased macro pressure in Russia, Latin America, FX and quality-related issues. On our calculations, GM’s exposure to each of these factors is at least as great as Ford’s,” Jonas wrote.
Bottom line is he doesn’t think that GM’s expectation of 9-10% profit margins by 2016 is realistic (though not impossible).
But there’s more.
Much of the chatter around Ford has involved the company’s ongoing efforts to reduce the number of “platforms” it uses to build its cars (platforms are the basic structures that become the cars we buy — an automaker can use one platform to construct several different vehicle models).
There’s also been discussion about the risk the company is taking in revamping its bestselling F-150 pickup truck to be lighter in weight.
GM is also looking at lightweighting strategies, but at the moment, Ford is getting all the attention, both positive and negative.
Jonas points out that GM is also planning to reduce its total number of platforms, but he argues that this kind of thing consumes tons of money. What he calls, with typically artful language, a “crucial industrial metamorphosis” is a process that will pit GM-the-carmaker against GM-the-company-with-shareholders.
“What concerns us…is whether shorter-term constituents in the stock market will appreciate the need for GM to expend many billions of up-front capital to execute such important goals that may ostensibly compete for capital return from share buybacks and dividends,” he writes.
Jonas’ downgrade is a reality check for anyone who thinks GM’s story could be on the ascent while Ford’s is on the decline.
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