What General Motors' 10K Hints About 2016, Citigroup Notes

In a report published Monday, Citigroup analyst Itay Michaeli commented that in the coming months shares of General Motors Company GM could re-rate higher due to share buybacks, tech and product improvements.

Michaeli noted that an $8 billion share buyback program is "doable" with several permutations on how it could play out. The first option would be a $10 billion buyback over two years with $5 billion done immediately and the remainder over approximately two years. This would allow the company to remain within its $30 billion desired liquidity range after $2 billion of assumed legal outflows.

Michaeli added that with buybacks in pace, the company's capital expenditure could turn to a positive from a negative and set up a 2016 product cycle that makes it easier for investors to pay peer group multiples on earnings.

Michaeli also stated that since October, General Motors' 2016 GMNA margin target of 10 percent has been met with skepticism because of the prevailing view that the company is too aggressive in "baking-in" $1,500/unit profit gains from its Cruze and Malibu products. The analyst added that based on the company's 10k filing, 2014 car profits (i.e., Cruze and Malibu) likely fell by $600 to $800 per unit versus 2013 while 2015 estimates assume a further $200 to $500 unit erosion.

"Said differently, General Motors' 2016 variable profit assumption appears to mostly bake-in a reversal of the profit erosion experienced in the last two years of these products' life – something that's actually quite common in the life of automotive product cycles, even under mixed macro conditions," Michaeli wrote.

Shares are Buy rated with a $49 price target.