Why Citi Isn't Panicking Over GM Yet - American Axle & Mfg Hldgs (NYSE:AXL), BorgWarner (NYSE:BWA)

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Citi analysts Itay Michaeli and Justin Barell assured they are not panicking over General Motors Company (NYSE: GM), even though China remains a substantial risk, and explain why in a recent report.

Citi’s Take

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While the firm sees some added risk to auto production in China following the recent market turmoil, its view of the wider sector has not changed materially, “After speaking with suppliers and assessing mid-August U.S. trends.”

In fact, Citi’s conviction that General Motors will outperform Ford Motor Company (NYSE: F) has actually increased with the recent release of F-150 data points.

For suppliers, the firm remains a Buyer of the following:

Mobileye NV (NYSE: MBLY)
Delphi Automotive PLC (NYSE: DLPH)
Visteon Corp (NYSE: VC)
Lear Corporation (NYSE: LEA)
Goodyear Tire & Rubber Co (NASDAQ: GT)
BorgWarner Inc. (NYSE: BWA)
Tower International Inc (NYSE: TOWR)
American Axle & Manufact. Holdings, Inc. (NYSE: AXL).

Why Citi Is Not Panicking

The analysts acknowledged, of course, that China remains high risk-to-results. However, four elements keep them from panicking:

1) They still think General Motors can earn roughly $5/EPS next year if income in China were to decline 20 percent in 2015 and 2016. “All-else equal, a simulated full 2016 China recession puts PF EPS in the mid-$4s with ~10 percent FCF yield.”

2) The company recently reiterated its China outlook for the second half of the year.

3) Concerns regarding General Motors’s “huge” China exposure are a bit overblown. Citi analysts understand General Motors sells more cars in China than in North America. However, “its minority stake in China JVs means NA earnings =5-6x China’s.”

The report continued, "Also, a major General Motors–China JV, SGM Wuling, operates rising local brands such as Baojun, which was +400 percent in July contributing to an overall up month for the JV (vs. a down July for Ford against an up Q3 production guide...overlooked risk?) Ex. SGMW, GM’s China profit exposure is actually similar to Ford’s,” the experts expounded.

4) Few investors and analysts are taking raw material tailwinds into account. In addition, Reuters recently reported that GM was adding large SUV capacity, a dominant segment in the company. The firm estimated that raw material tailwinds could reach $500 million to $1.5 billion, while SUVs could hit $300 million —providing a potential big offset to China.