Whoa! That was my first reaction to General Motors' (GM) press release Monday morning. With General Motors' bold moves to end production at three assembly plants and two powertrain plants, CEO Mary Barra has thrown down the gauntlet to the company's global workforce: adapt or die.
Unsurprisingly, the market liked the release; pushing GM's shares up around 5% to $37.78 as of 3:25 p.m. ET. There were some inklings of big changes at GM on Sunday -- especially out of Canada regarding the Oshawa facility idling -- but the size and scope of the cuts are much greater than I had anticipated. It seems that other analysts were surprised as well. Stocks will always move on the incremental news, and in this case a broad, sweeping reorganization of GM was clearly not fully priced in.
Monday's announcement changes the narrative on GM and will shift the focus toward "Future GM," especially the Cruise autonomous vehicle division. Other things being equal that should be enough to power GM shares back into the $40s, but with stocks other things are never equal. I am still very worried about the "bad tape" that has prevailed in the broader stock markets in October and November.
So, having spent all of my professional career following the car sector, and more than a decade as a investment bank auto analyst, it is easy for me to cut through the noise and compose a list of winners and losers:
Winner: GM CEO Mary Barra: I have mentioned this before in my RM column, but Barra represents a breath of fresh air in stale Detroit management culture. To make these cuts and absorb the estimated $3.0 billion to $3.8 billion cash restructuring costs mooted in today's announcements, GM needed to have a rock solid balance sheet and a strong vision toward a future as a mobility company, not just an automaker. That comes from the top.
Loser: United Auto Workers. Barra is setting up the mother of all battles with the United Auto Workers and its Canadian cousin Unifor. The five plants affected (Oshawa, Ontario, Hamtramck, Michigan, Lordstown, Ohio, final assembly and White Marsh, Maryland and Warren, Michigan powertrain) have been "unallocated" beginning in 2019. That dysphemism translates to a Jack Welch-style neutron bomb being unleashed on those communities. By simply removing the product from those plants GM now has the ultimate leverage over their locals and can really twist the screws in next year's contract renegotiations. Those factories could survive, but they would have to be retooled to produce different vehicles. With today's actions GM management has indicated that it is currently producing too many different models, anyway, It's a sticky wicket for the UAW.
Winner: The South Koreans. The models being killed in the North American market--Chevy's Cruze, Impala, and Volt; Cadillac's XTS and Buick's LaCrosse--are all three-box sedans, or as usually described in the media, "cars." Only a person who hasn't been paying attention could have missed the U.S. consumer's multi-decade shift in preference to crossovers with their greater functional utility and more aerodynamic look. There are still a few auto buyers, however, that want the three-box shape and more importantly a really, really low entry-level price point (the MSRP for the Cruze starts at $17,995.) With Ford (F) and now GM largely abandoning that market, that opens up a hole for makers that can produce such models cheaply in Asia and import them to North America. So, Hyundai Motor (HYMTF) --with its Hyundai, Kia and Genesis brands--is going to be able to attack that market niche with much less completion, implying better margins. I like Hyundai Motor stock as a deep value play here, although the U.S. ADR is quite illiquid.
Loser: U.S.-based suppliers. GM is willingly ceding market share in what is clearly the less profitable segment of the market. Lower production from a Big Three maker is a gut punch to companies that were built to supply parts quickly to the Midwestern hub encompassing auto plants such as Oshawa, Youngstown (Lordstown) and downtown Detroit's Hamtramck. It's just too late in the U.S. economic cycle to own stocks of U.S. auto suppliers, especially since those companies don't have the leverage to pull off a transformational move such as GM's. The names are familiar--Borg Warner Automotive (BWA) , Lear (LEA) , Delphi (DLPH) , Goodyear (GT) , etc.--but you should be avoiding them all in your portfolio.
Winner: Auto analysts: Fleet sales represented 20.5% of GM's sales in the third quarter, up sharply from the 17.4% in the third quarter of 2017. When I started following autos in 1992 I was taught to despise fleet sales as they are traditionally lower margin than consumer sales, especially sales to daily rental car fleets. Barra seems to have realized that the choice between keeping plants running by pumping models to daily rental fleets and just shutting the plants--albeit incurring large restructuring costs in the process--really should be an easy one. Hallelujah! Auto analysts rejoice!!!
Loser: Rental car companies. As if this industry weren't being disrupted enough by Uber, Lyft, Grab and others, now a source of fresh new product is being killed off. The idea that a new car is on offer is one of the few remaining selling points for car rentals, and with that supply reduced the industry is looking even more unattractive. Hertz (HTZ) and Avis (CAR) are jumping in today's buoyant market, but that move should be faded and these two names continue to be excellent ideas for investors looking to short stocks.