Jefferies Initiates General Motors At Hold, Sees Limited Upside In Lieu Of 'Peak Cyclical Conditions'

Shares of General Motors Company GM are trading at multiples that are among the highest in the sector, Jefferies’ Philippe Houchois said in a report. He initiated coverage of the company with a Hold rating and a price target of $33.

End Of Exceptional Cash Returns

General Motors had undertaken “drastic restructuring” and came out of that with substantial excess liquidity. The company has used this to return more than $31 billion in cash to shareholders over five years.

Analyst Philippe Houchois commented, however, that the period of exceptional cash returns may be nearing an end “as GM’s balance sheet ratios have normalised and the industry prepares for more muted cyclical conditions.”

The guidance suggests share repurchases worth another $1.2 billion in the back half of this year. “From here, renewed risk from Takata related recall (industry issue, not GM specific) and the court decisions making GM potentially liable for pre-Chapter 11 ignition issues suggest non-operating outflows will increase,” Houchois mentioned.

Peak Cyclical Conditions In NAFTA

General Motors’ excess dependence on NAFTA for operating earnings is likely to continue longer than was anticipated, since GM Europe would likely return to the red in H2 “given seasonality and relatively high exposure to the UK,” the analyst stated.

Due to the expectations of peak NAFTA earnings in 2016 and slow improvements in Europe on UK-related risks, the EPS estimates for 2017 and 2018 have been reduced by about 10 percent.

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