Will buyers pay extra for more fuel-efficient GM pickups? They may not if gas stays cheap, and that could squeeze GM's profits and stock price. Source: General Motors Company.
General Motors stock has had a bumpy ride since it returned to the New York Stock Exchange late in 2011. Investors who bought at the IPO price of $33 aren't looking at much of a gain three years on -- but since mid-October, the stock has jumped about 20%.
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What's going on? The story with General Motors has been one of tremendous promise that often looks like it's starting to be realized -- and pitfalls from Old GM's past that continue to cause the company to stumble.
GM has a lot going for it right now: a strong, level-headed management team, drastically improved products, and several long-term initiatives that stand a good chance of boosting the company's profitability significantly in time.
But a lot of things could still go wrong for the General. And even if CEO Mary Barra and her team succeed over time, there are several things that could derail the stock price between now and then. Here are three.
Reason No. 1: Another recall shoe could drop
GM's stock lost 12% of its value in 2014, even as sales were strong and its business execution hard to fault. The reason: a massive recall scandal that caused months of embarrassment -- and was directly responsible for a $2.8 billion hit to GM's pre-tax earnings.
The recalls are done, the cars are getting fixed, and GM is wrapping up a settlement fund for victims of accidents related to an ignition-switch defect in some models made before GM's 2009 bankruptcy and restructuring. The sense that the recalls are fading into history's rearview mirror has helped lift GM's stock recently -- but there might be another shoe left to drop.
In fact, there might be two: GM is very likely to end up making a fat payment to settle criminal investigations under way by the U.S. Department of Justice and many state attorneys general, and it might have to make another to settle civil litigation. Toyotaended up paying $1.2 billion to settle similar investigations after its own recall drama; GM could find itself writing an even bigger check to the feds -- and another to victims.
I think that some expectation of big payments to come is built into GM's stock price right now. But if those payments end up being bigger than Wall Street expects, or if GM decides to go to trial and loses a big court case, then GM shares could take a heavy hit.
Reason No. 2: The U.S. auto market could be peaking
Autos are a cyclical business. Automakers' profits -- and typically, their stock prices -- rise and fall with economic cycles. That's because automaking requires high fixed costs: factories, tooling, and unionized workforces that need to be paid for whether business is strong or slow.
Former GM CEO Dan Akerson said that post-bankruptcy GM was structured to be profitable as long as the U.S. new-vehicle market was running at a rate above 10.5 million sales a year. That's the rate that would be expected at the trough of a deep recession, so if he was right, GM is unlikely to dive into the red anytime soon.
But that doesn't mean that profits can't be squeezed. U.S. sales were at about 16.5 million last year -- and GM North America posted a healthy profit, despite the recall costs. But it's unlikely to grow a whole lot from there: History suggests that 17 million annual sales is about the best we'll get from a healthy U.S. economy.
In the past, when the overall market's growth has peaked, some automakers have become aggressive with incentives in an effort to eke out market-share gains. The weak yen puts the Japanese automakers in a good position to win a discount war -- and whether GM tries to match their incentives or holds the line on its pricing while giving up sales, its profits will drop.
Something like that is likely to happen eventually. If and when it does, investors will start unloading the stock.
Reason No. 3: Low gas prices could raise GM's costs
On one hand, low gas prices seem like a boon for a company like GM, which still makes a lot of money from sales of full-size pickups and big SUVs.
But there's a flip side to that: Even while it sells lots of big trucks, GM is making big investments in greener vehicles. It has to: Tightening regulations around the world will force all automakers to improve their fuel economy and carbon dioxide emissions over the next several years.
GM is determined to be a leader in greener cars and trucks, and that's admirable. It's known to be working on much more fuel-efficient pickups, and it's bringing several new electric cars and plug-in hybrids to market.
It's also taking steps to improve the fuel economy of all of its vehicles, across its entire portfolio. But here's the thing: Improving a vehicle's fuel efficiency costs money. Whether it's adding a hybrid drivetrain, developing a more advanced gasoline engine, or using lighter materials or higher-tech transmissions, adding fuel efficiency adds to the costs of building a car.
The problem is, with $2 gas, GM may not be able to pass those costs on to consumers. Buyers may not be willing to pay a significant premium for, for instance, a hybrid pickup truck. But under the current regulations, GM has to develop and sell them anyway. The upshot could be a painful squeeze to GM's margins until it figures out how to offset those costs -- and a painful squeeze to its stock price, too.
The article 3 Reasons General Motors Company's Stock Could Fall originally appeared on Fool.com.
John Rosevear owns shares of General Motors. The Motley Fool recommends General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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