Cars and Drivers

Why GM Took a Big Downgrade on Monday

Jon C. Ogg

Published: February 29, 2016 11:55 am

Last Updated: January 13, 2020 12:34 pm

General Motors Co. (NYSE: GM) took a key downgrade on Monday. Argus, a truly independent research firm, clear of any traditional brokerage conflicts of interests, downgraded GM to Hold from Buy. While many firms have noted the value proposition, the key note here is about fears of slower sales expectations.

Argus did note that GM recently has shown very strong performance. And the company tried to refute slowing concerns in recent weeks with a larger dividend and a large stock buyback. That being said, Argus is worried that 2016 will be the peak of the current cycle for U.S. auto sales.

The report pointed out that the firm currently expects U.S. light vehicle sales to rise by only 1.1% in 2016. Why this matters is that it follows sales growth of 6.0% in 2015 and that followed sales growth of 7.7% in 2014.

Where the report gets interesting is excluding U.S. sales. Argus now calls for slower growth in international sales, with those sales declining in some emerging markets. Monday’s report now looks for adjusted earnings growth to decline to 9.6% in 2016 — from a sharp 64.6% in 2015.

In early February, GM’s adjusted earnings of $2.3 billion (or $1.39 per share) were up from the prior year’s $1.6 billion (or $1.19 per share). This was handily above the Argus estimate of $1.11 earnings per share (EPS) and was also above the consensus estimate of $1.21. The firm did actually raise its own 2016 estimate to $5.50 from its pre-downgrade target of $5.42. This is to reflect GM’s own guidance and would line up against a consensus EPS estimate of $5.49.

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