Goldman Downgrades GM On Absolute Downside In 2018

General Motors CompanyGMDavid TamberrinoGeneral Motors' stock rating from Neutral to Sell with an unchanged $32 price target (see Tamberrino's track record here). The auto cycle likely peaked in 2016 when a total of 17.5 million vehicles were sold in the U.S., Tamberrino wrote in the downgrade note. As such, investors should turn cautious on the auto sector as the annual sales rates of new vehicles will normalize to just 15.0 million in 2020. This is particularly concerning for U.S.-based automakers as more than 100 percent of their profit and free cash flow is generated in North America. In General Motors' case, 106 percent of its automotive profit and 108 percent of free cash flow is generated in North America. General Motors will likely face ongoing pressure in the important pickup truck segment as it approaches a changeover in 2018 with incremental downtime. At the same time, Ford Motor Company F will be pushing its refreshed F-Series lineup, which could gain share from General Motors and create a $2 billion headwind in volume/mix for General Motors.

Also, the crossover utility vehicle segment is seeing heightened competition and the class represents 27 percent of General Motors' entire portfolio, the analyst wrote. In fact, the company's CUV profitability has already compressed due to competition and this trend will likely continue next year.

Finally, a potential three-year downturn in the auto sector will result in General Motors' cash balances flirting with its minimum operating levels of $7 billion to $8 billion. This would imply a potential revolver draw or a cut to the dividend payment.

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