GM Faces Challenges in Labor Costs and Electric Vehicles

There is a lot for management to discuss as General Motors (GM) faces various challenges. The recent contract agreement with the United Auto Workers has put the spotlight on labor costs. Additionally, GM's Cruise unit has been experiencing difficulties, and the sales of its battery-electric vehicles have fallen short of expectations, causing a dip in investor confidence.

Presentations by CEO Mary Barra and CFO Paul Jacobson

GM's CEO Mary Barra and CFO Paul Jacobson are scheduled to make presentations at an upcoming event, set to commence at 8 a.m. Eastern time.

Analyst Concerns

Citi analyst Itay Michaeli has outlined several key issues in a research report, hoping that GM addresses them during the meeting. These include profit margin targets, strategies to reduce losses from electric vehicles while boosting sales, accelerating returns of capital to shareholders, and resolving problems at Cruise.

Profit Margin Targets

GM has communicated its ability to generate an operating profit margin between 8% and 10% in its North American business. However, Wall Street projections are slightly lower, hovering around 9% for 2023 and 2024. Unfortunately, investors lack confidence in this figure due to increased labor costs being a significant contributing factor.

Impact of Wage Increases on Prices

The contract agreement with the UAW involves wage increases of approximately 25% over its duration until April 2028. This includes an 11% raise that started upon contract ratification. Fully compensating for these wage increases could potentially require a rise in car prices by $300 to $500.

GM must consider how to limit the impact on profit margins, whether that be through higher prices, improved operational efficiency, or offering buyouts to older, more expensive workers. Investors will be keen to learn about the company's plans in this regard.

Sales of Electric Vehicles

Investors also seek reassurance regarding the success of GM's new electric vehicle models, such as the EV Blazer, EV Silverado, and EV Equinox. In the third quarter, electric vehicles accounted for only 3% of GM's U.S. sales, while the overall industry proportion was closer to 9%.

GM faces the challenge of increasing the market share of its electric vehicles, and investors will be interested in hearing GM's plans to achieve this goal.

Overall, as GM navigates these challenges, achieving better labor cost management, boosting electric vehicle sales, and maintaining investor confidence will be key objectives for the company.

Cruise's Confidence Issues

The self-driving taxi business, Cruise, has been dealing with a setback in California. After an accident, their license to operate their autonomous taxis was suspended, causing CEO and co-founder Kyle Vogt to resign. This incident has raised questions about the future of Cruise and its leadership.

It may not be necessary for GM management to outline explicit plans for Cruise's next steps or for increasing electric vehicle (EV) sales in order to please investors. Analyst Michaeli believes that even a small positive development could satisfy shareholders.

Currently, expectations for GM are low, as the stock is trading at only four times the projected earnings per share for 2024.

Michaeli rates GM shares as a Buy, with a target price of $90. This is the highest target price on Wall Street and values GM shares at around 14 times the estimated earnings per share for 2024. For comparison, GM's forward price-to-earnings (P/E) ratio has ranged from four to 10 over the past few years.

Additionally, Michaeli believes that GM can afford to increase stock buybacks, which would be a positive move for investors and an indication of the company's confidence in generating free cash flow in the future.

GM investors have been in need of some positive news. Over the past year, GM shares have fallen approximately 27%, while the S&P 500 and Dow Jones Industrial Average have risen 15% and 5%, respectively. Traditional automakers have faced challenges such as higher interest rates, a slowing economy, and increased labor costs, which have dampened investor enthusiasm. Ford Motor stock has also experienced a decline of about 24% in the past year.