General Motors (GM) reported a strong first quarter, beating Wall Street’s earnings expectations and raising its guidance for 2023. However, since the announcement, GM’s stock has dropped by almost 6%, closing at $32.22, marking its lowest closing price since October. The stock is now down 26% from its 52-week high of $43.63 a share, and down 4.2% for the year. The surprising drop in stock prices has left investors wondering why the stock is not rallying.
Although GM’s year started well, analysts believe that the rest of the year will be challenging. Wall Street analysts predict that GM will face eroding pricing power, labor concerns, and difficulties in producing electric vehicles, which will make it harder for GM to perform at the profitability levels it has been. GM’s CFO, Paul Jacobson, said that the company expects flat pricing compared to last year. Higher prices are bad news for consumers, but great for automakers.
In addition, GM is currently facing challenges in China due to pricing risks and rising steel costs, which could impact the company’s pricing expectations. However, GM has shown restraint in not overproducing this year, which has helped keep inventories in line with demand and prop up prices.
GM is also approaching negotiations with the United Auto Workers and Canadian union Unifor, which brings the potential for work stoppage and increased labor costs. The new union leadership ran on platforms of reforming the organization and standing up to automakers. Labor strikes can be costly and deplete vehicle inventories. A 40-day strike against GM during the last round of negotiations four years ago cost GM about $3.6 billion in 2019, including $2.6 billion in earnings before interest and taxes during the fourth quarter.
GM CEO Mary Barra told investors that the automaker is working to “build a strong relationship with the new leadership,” but declined to speculate on the talks and the company’s expectations for the negotiations.
Barclays analyst Dan Levy said that “GM continues to do the right things, but we believe cycle normalization and challenges in EV ramp make for a tough investment thesis.” GM upped its full-year adjusted earnings expectations to a range of $11 billion to $13 billion, from a previous range of $10.5 billion to $12.5 billion. However, those results represent a decline of between 10% and 24% from the roughly $14.5 billion in adjusted earnings it reported in 2022.
In conclusion, GM’s stock drop despite strong Q1 earnings and guidance raise can be attributed to the challenges and uncertainties the automaker faces ahead. Investors are concerned that GM may not be able to perform at the same profitability levels due to eroding pricing power, labor concerns, and difficulties in producing electric vehicles.
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