Citi Research analysts Itay Michaeli, Christopher Reenock and Justin Barell rate General Motors Company (NYSE:GM) as a Buy as they take a close look at some recent trends in the auto industry.
General Motors Company (NYSE:GM) shares are down ~2% this morning on what we believe are negative reactions to another article (Automotive News) discussing an upcoming “unprecedented promotional assault” in March U.S. incentives. The article suggests that the incentives will not only span pickups, but nearly every vehicle in GM’s lineup. For pickups, the article indicates that a Chevy Truck Month promotion will offer the same price on 2014 Silverado trucks as employees and suppliers, or dealer invoice plus destination charges and a $150 program fee.
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Impact Not as Scary As Market Reaction Implies
A few points: (1) Most importantly, our initial view is that the net incentive spend from General Motors Company (NYSE:GM)’s March programs won’t be dramatically different than February spending. This is because the program replaces several promotions that expire. (2) General Motors’ quarter-to-date U.S. retail ATPs are running over $1,000 higher YoY, or more than double our modeled estimate of +$~500/unit (though share is lower). That means that, in our view, GM has ample cushion to spend additional dollars in March to recapture share (again, we don’t believe that today’s article implies this, but there is cushion nonetheless). (3) March is typically a seasonal higher incentive month vs. February (March Madness, etc.). Last year, General Motors’ March incentives rose $300/unit and ATPs fell by nearly $500/unit vs. February. If this were to occur again, GM’s Q1 pricing would likely still come-in ahead of our estimate and could help recapture some lost share.(4) In our mid-month pricing-made-easy report (U.S. Autos & Auto Parts – Pricing-Made-Easy: February Mid-Month Checks & Conf. Call), we noted that General Motors’ tame incentive spend through mid-February would likely mean an additional spending hike to recapture share.
Though the February SAAR isn’t likely going to be great again due to weather (<16mln) and we are seeing legitimate pricing pressures in certain segments (mid-size cars), we do not believe this morning’s article reflects a sudden panicky strategy shift by General Motors. As such, the share price reaction appears overdone this morning, in our view. Ahead of next week’s sales print, it should be noted that GM does face a tough YoY market share comp in February (18.9%) but that the comp does get easier in March (17.0% in March 2013).
Pricing a #1 Topic of 2014
Auto pricing has become a top investor concern for 2014, and making matters worse, we believe that most forecasters do not have the proper data to assess this. Our monthly “pricing-made-easy” report provides realtime trends and the P&L impact to the OEMs.