Stifel Adjusts Model on GM (GM), Comments on July U.S. Sales Results

Stifel affirms General Motors (NYSE: GM) at Hold following the company's July U.S. sales update.

Analyst James Albertine is lowering his Q3 EPS estimate from $1.04 down to $1 and 90 basis point erosion of automotive gross margin to 12.1 percent of sales. FY EPS moves from $2.80 down to $2.78, while FY15 EPS is raised from $4.18 up to $4.54.

Key takeaways from the sales numbers include:

• GM identified a potentially $400 mm special charge related to the ignition switch compensation program based on management's best approximation of the amount that may be paid to claimants, but emphasized there is no cap on this charge. However, given the uncertain nature of the program management estimated additional costs for the program may be up to another $200 mm.

• The updated GMNA recall expense of $847 mm was driven by a data processing upgrade that enhanced GM's ability to estimate recall costs. GM noted that the sum is the best estimate of remaining recall expense for the next 10 years for the 30 mm vehicles on the road today. GM will now accrue estimated recall expense at the time of vehicle sale (like current warranty expense). Future recall expense will normalize at a slightly higher level than the run rate prior to 1H14.

• Management also noted that some of the recall activity has proved to be a stimulus to reconnect with the owners of older model vehicles. To date, GM has sold 6,600 vehicles under a program enacted to reach drivers affected by ignition switch recall.

• In GMNA, carryover pricing had a $600 mm unfavorable impact that was offset by declines in materials costs. Management reiterated guidance for 10% EBIT margins in 2015, from a 2Q14 9.2% (ex-recalls). Some concern was raised over the cadence of new product launches, but management noted that the road to a 10% GMNA EBIT margin also include (a) cost efficiencies, (b) logistics optimization, and (c) leveraging the business with GM Financial and a growing customer care business. Initiatives within the sphere of costs/optimization are well underway and management noted they have executed and seen results thus far.

• GMIO has witnessed some benefit from exit of Chevrolet in Europe given manufacturing costs associated with the plant in S. Korea. Management did note some long-tailed capacity issues with the plant that will take some restructuring. For GMIO in the short term, particularly with respect to China, GM continues to focus on building brand awareness and capturing growth.

• The macroeconomic environment in South America continues to be weak, but GM anticipates some positive aspects could drive healthier 2H14 results. Management noted the potential for currency releases and or production to take hold in Venezuela. In the short-term, management noted they will continue to execute and drive efficiency via fixed cost control and restructuring initiatives.

• Management noted that recall related charged negatively affected the overall EBIT margin by -2.9%. In aggregate, EBIT margin was 3.4%.

For an analyst ratings summary and ratings history on General Motors click here. For more ratings news on General Motors click here.

General Motors closed at $33.82 yesterday.

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