Expectations, Estimates And Justification
Nathan acknowledged that General Motors "handily" exceeded expectations in its second-quarter print and raised its 2016 outlook. However, the company's upwardly revised earnings-per-share guidance of $5.50 to $6.00 implies its earnings will actually decline sequentially.
Nathan added that he expects further declines in General Motors' earnings in 2017 due to a full year of negative impact in the U.K. due to the Brexit vote. He added that prior tailwind effects of volume and pricing are "subsiding" in North America as "demand momentum slowdown."
With that said, Nathan is now expecting General Motors to earn $5.80 per share for the full fiscal year. The estimate implies "limited earnings outperformance potential," which justifies his downgrade to Neutral from Outperform although a $31 price target remains unchained.
The analyst's price target assigns equal weights to a $36 P/E-based valuation (7x to 2017 estimated earnings per share) and $26 free cash flow valuation ($2 billion in free cash generation across a cycle).
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