GM cost cutting plan - is it a good bet?

GM announced a major cost cutting restructuring plan on Monday for its North America segment, or GMNA.

The plan consists of closing five plants (3 in the US, 1 in Canada, and 2 still to be announced) , laying off 15% of its workforce and streamlining its vehicle lineup in the next few years.

The company said the measures would save about $6 billion in the coming years, including about $4.5 billion in cost cuts, and promised to funnel more resources into autonomous and electric cars.

The closing of these plants means that production for vehicles such as the as the Chevy Cruze compact sedan, Cadillac XTS, the Chevy Volt, the Cadillac CT6, and the Chevy Impala will halt.

Their change in plans come to no surprise as what GM is doing is basically concentrating on where it makes money and what’s in demand.

Year to date these models only made about 9% of GM sales. In contrast, Light truck models (pickups, cross overs and SUVs) are nearly about 70%! The company also announced that it will invest heavily in its future by doubling their resources towards Electric vehicles and autonomous driving.

A very important statistic which is in favor of GM’s move is that since the financial crises, demand for cars as a % of total vehicles sales has been declining steadily (from 55% to 32% - see chart below).  Basically, car sales now represent only a third of total vehicles sales as consumers opt for pickups, SUVs, cross over and trucks.

Trump reacts

As we have now been accustomed to, this announcement did not come unnoticed by President Trump as he tweeted his disappointment and commented on the fact of why GM did not close any plants in Mexico and China. He also “threatened” to cut their subsidies for EV (full tweet below)

Let’s look at some fundamental numbers for the GM stock:

P/E: 6.23 (vs 15.03 industry)  Forward P/E: 6.34 (vs 12.23 industry)
P/B : 1.36 (vs 2.05)
P/S: 0.35
Dividend: 4.14%
Revenues are on the rise and in line with the average
Positive net income after negative results last year
Free Cash Flow is currently negative however with the new cost cutting plan, GM will be expecting a cash injection

Irrespective of what Trump says, I think this move by GM is very interesting as they are working towards their core business and getting better in realizing their economies of scale. In my opinion therefore, this represents a good opportunity for the long-term investor due to the stability of the company and its relatively high dividend.

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