General Motors Will Fall Further Before Hitting Bottom
General Motors (NYSE:GM) has not been a good stock to own so far in 2014, with shares trading down by 10 percent. While some investors might see this weak price action amid bearish news as a contrarian indicator, I suspect that the stock has more downside risk. Here’s why.
First, and most obviously, is the company’s trouble with recalls. The company has recalled millions upon millions of vehicles over the past couple of years. This is extremely costly. It also makes the company look bad, and its products appear to be dangerous. With so much competition in the auto space, I suspect that these recalls are going to hit sales in a big way, with long-term, loyal customers being the only reliable source of demand.
Second, while the company reported higher sales year over year, it is also reporting higher operating expenses, meaning that its operating profits are declining. The company’s costs are rising for several reasons, including high commodity prices, high R&D costs, and high salaries. Regarding this last point, we need to recall that the United Auto Workers union owns a big chunk of General Motors now, and while it is a shareholder, its loyalty isn’t to shareholders but rather to the workers. The result is that GM workers are more likely to be overpaid, and this hurts the value of the company.
Third, if you look at the company’s financials, you see two bearish trends: an increasing debt load and an increasing share count. The former makes the business riskier. It means the risk that the company will not be able to meet its obligations in a credit crunch is gradually increasing. The latter is akin to inflation — more shares outstanding means that each individual share is worth less.