General Motors (NYSE:GM) has been locked in a battle with Ford (NYSE:F) for as long as both companies have been around. These days, their enmity has turned towards the electric vehicle front as they try to innovate for the future. Recent performance indicates General Motors is outpacing Ford at the moment. However, that doesn't mean the company is free of issues. General Motors has been hit hard by the rising cost of raw materials, which has squeezed margins and forced the company to raise prices on its vehicles. General Motors will need to find a way to address these challenges to remain competitive in the years ahead.
The next year's inflation will weigh down heavily on the company's results. UBS Group (NYSE:UBS) cited this as justification when it downgraded the car giant to "Neutral" and slashed its price target to $38 from $56. UBS predicts a recession and warns that General Motors will feel the storm's impact, especially in Europe.
General Motors, for its part, is looking good going into earnings season. The automotive company saw a 24% increase in third-quarter sales to 555,580 vehicles as buying was fueled by pent-up demand and the semiconductor supply stabilized. This was a sharp turnaround from the second quarter when General Motors reported a 15% drop in U.S. sales.
Undoubtedly, the markets are bearish at the moment, and the situation will not change anytime soon. Under this environment, the near-term outlook for General Motors remains stressed, even if the long-term outlook seems strong.
How inflation and rising interest rates are putting pressure on General Motors
General Motors has been on a roll lately, reporting strong sales and profits in the most recent quarter. However, the company is facing some significant headwinds that could threaten its profitability. First, General Motors is still dealing with supply chain disruptions from the global chip shortage. This has caused production delays and component shortages, leading to lost sales and higher costs. Even though the supply has stabilized somewhat, that doesn't eliminate past issues, and new regulations from the U.S. government threaten to plunge the semiconductor supply chain into chaos once again.
Inflationary pressures are further squeezing margins. General Motors is responding by cutting costs and focusing on its most profitable vehicles. Whether this will be enough to overcome the challenges on the horizon is not known at this time. General Motors is a company that has weathered many storms before, but not without heavy losses; such is the nature of a cyclical industry.
Finally, U.S. interest rates are rising, increasing the cost of borrowing for General Motors and buyers of its vehicles. The Fed has increased its benchmark rate five times this year. Experts predict the rate will be at 4.4% by the end of the year, and by 2023, the prediction is for it to rise to 4.6%. While General Motors has navigated these challenges so far, they will likely become more daunting in the coming months. As a result, General Motors' profitability may come under pressure in the near term.
General Motors' electric vehicle ambitions will keep bulls interested
General Motors plans to sell 30 different models of electric vehicles by 2025. A $35 billion investment strongly indicates the automaker's commitment to investing in electric vehicles. Likely, other automakers will also make major investments in this area, leading to breakthroughs in the sector and high competition. The EV market is still relatively small, but it is growing rapidly as consumers become more aware of the benefits of electric vehicles.
General Motors is planning on going all-electric with its vehicles, while Ford shows a more diverse approach with different types of electric vehicles and hybrid models. General Motors offers the Chevrolet Bolt EV and Chevrolet Spark EV, as well as the Cadillac CT6 PHEV. Ford may be more hesitant to embrace EVs, but it does have some great options such as the Mustang Mach-E, F-150 Lightning, E-Transit Van, etc. The contrasting approaches by General Motors and Ford underscore the different strategies automakers are taking as they look to meet consumer demand for more fuel-efficient and environmentally friendly vehicles.
General Motors' pure-play approach looks better in the long-run, in my opinion. General Motors is making a big bet on electric vehicles, aiming to put all its eggs in one basket. The company has said it will phase out the production of gas-powered cars by 2035 and will only sell cars with zero tailpipe emissions by then. In contrast, Ford is taking a more cautious approach, saying it will continue producing gas-powered cars alongside electric cars. General Motors' approach looks risky but could pay off in the long run. If the market for electric vehicles grows as General Motors expects, the company will be well-positioned to dominate the market.
Takeaway
General Motors is an icon in the American automotive industry. The company has been in business for over a century and constantly innovates to remain relevant. However, General Motors is facing many challenges in the near term.
First and foremost, automobile demand will likely fall sharply as inflation increases and consumers tighten their budgets. In addition, General Motors is facing a severe supply shortage due to the semiconductor crisis. This has led to production cuts, which is likely to weigh on the company's financial performance in the previous quarters.
From a long-term perspective, the investment thesis for General Motors looks strong in my view, especially compared to Ford which is dragging its feet. Those looking for a quick turnaround, though, will be disappointed.
This article first appeared on GuruFocus.
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