Goldman Sachs downgrades GM, stock falls

Ian Thibodeau
The Detroit News
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General Motors Co. closed down Monday following several months of steady growth after the equity research team at Goldman Sachs downgraded the stock from “neutral” to “sell.”

The stock plummeted in premarket trading following the release of the Goldman Sachs note Monday morning, opening at $42.91 per share Monday after closing at $44.64 Friday. By the end of Monday, the stock regained some ground but at $43.37 was still down 2.8 percent from the previous close.

The Detroit automaker has turned strong profits amid plateauing vehicle sales due in part to profitable SUVs and trucks, the company’s decisions to exit Europe and its push into autonomous technology and electric vehicles. Those moves drove up GM shares more than $10 apiece since July, a 20 percent gain. In spite of the drop Monday, GM shares were still up from $42.15 at the start of October.

Goldman’s David Tamberrino in a Monday note said 2018 doesn’t look as good for the Detroit automaker. He expects the cost of rolling out new vehicles and a continued plateauing of sales will hurt GM’s profitability and earnings.

Crosstown rival Ford Motor Co. is better positioned for next year, Tamberrino said. The Dearborn automaker has more cash, which is forecast to be $28 billion by year’s end, and is expected to perform well in every region in 2018, he said.

GM has more crossovers in its portfolio than Ford. Competition in that segment is expected to increase, which would put more pressure on GM than Ford, Tamberrino wrote.

The downgrade comes less than a week after GM reported adjusted pre-tax earnings of $2.5 billion from its continuing operations as the Detroit Three automakers execute a balancing act to drive near-term profits and map plans for a future in mobility.

“GM has outperformed Ford primarily on cost take-out and an upward lift in mix given higher exposure to crossovers, in our opinion,” he wrote. “However, with its pickup truck refresh in 2018, we expect to see a reversal of performance with GM North America earnings inflecting downward year-over-year, and Ford’s North America (and overall company performance) up year-over-year.”

Bringing an autonomous vehicle to market ahead of schedule — at a cheaper cost than expected — could help the outcome, Tamberrimo wrote. The company could help itself by further reducing inventory levels, “rationalizing product with demand” and lowering its incentive spending, he wrote.

Others said GM is doing well. David Kudla, CEO of Grand Blanc-based Mainstay Capital Management LLC, said GM will continue to expand its profit margin and has made decisions that position the company well.

“I believe that Goldman Sachs (Tamberrino) analysis, thesis and conclusion on GM is wrong,” Kudla wrote in an email. “GM is proving it can deliver strong earnings at lower than peak volumes (and) has articulated one of the most comprehensive strategies in terms of flexible mobility and EVs. And GM is already putting the pieces of that strategy into place. They are quarters or even years ahead of many other automakers in this area.”

The Detroit automakers are expected to continue to lean on trucks and SUVs for profits as sales normalize and U.S. consumers stop buying small cars. Kudla said GM is in the same position as other automakers there.

Tamberrino and other Goldman Sachs analysts said expansions in the electric vehicle line-up will likely hurt GM in the short-term due to high battery costs.

GM will have to make a series of moves to prove it has the cash reserves to manage a potential downturn, and speed up investments in mobility to change minds at Goldman Sachs.

“We believe that Ford has been a prudent operator ... and are encouraged by the company’s strategic cash balance ... as well as its willingness to rationalize production against a softening demand environment,” Tamberrino wrote.

Ford and Fiat Chrysler Automobiles NV last week also posted consistent profits amid sales declines.

Ford closed up 0.1 percent Monday at $12.10. Fiat Chrysler, which was not mentioned in the note, closed up 0.6 percent at $17.25.

Twitter: @Ian_Thibodeau

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