Gm's Risky Business: High Stakes Investment?

Investing in General Motors (GM) stock is a topic that has been widely discussed in the financial world, with some considering it a high-risk investment. In January 2025, investors saw an increased risk of GM defaulting on its debt, with credit default swaps trading above previous highs. The company's stock price has experienced fluctuations, and it has been labelled as a sell candidate by some analysts. However, it's important to note that investing inherently involves risk, and what may be considered high-risk for one investor may not be the same for another. Factors such as financial goals, risk tolerance, and investment horizons play a crucial role in determining the level of risk associated with any investment.

GM's earnings potential

General Motors (GM) has a competitive lineup in all segments it competes in, combined with a reduced cost base. This enables the company to have the scale to match its size.

GM's 2025 financial guidance includes net income attributable to shareholders of $11.2-$12.5 billion, or $11-$12 in earnings per share. The company expects adjusted earnings before interest and taxes (EBIT) of $13.7-$15.7 billion, or $11-$12 adjusted EPS, and adjusted automotive free cash flow between $11-$13 billion.

In the fourth quarter of 2024, GM reported revenue of $47.7 billion, up 11% from the same period the previous year, and adjusted earnings per share (EPS) of $1.92, compared to an estimated $1.89. For the full year 2024, GM reported adjusted EBIT of $14.9 billion, or $10.60 adjusted EPS, and net income attributable to shareholders of $6 billion, or $6.37 EPS.

While GM faces challenges due to regulatory uncertainty and a potential slowdown in the electric vehicle market, the company expects improvements in scale, fixed-cost absorption, and a continued focus on cell and vehicle cost reductions to drive improved earnings in 2025.

Overall, GM's strong financial position, competitive lineup, and cost-reduction strategies position it for solid earnings potential, despite potential headwinds in the industry.

Tariff uncertainty

In 2025, the Trump administration's proposed tariffs and the potential for a trade war created a challenging environment for the automotive industry. The possibility of a 25% tariff on imports from Canada and Mexico, along with retaliatory tariffs from these countries, threatened to increase costs for automakers and disrupt complex supply chains. This uncertainty impacted investment decisions and business operations, with companies struggling to determine how to mitigate the potential financial burden.

The automotive industry, including GM, faced challenges due to the unpredictable nature of tariff policies. The potential for sudden changes or reversals of free trade agreements added complexity to business strategies. This was further exacerbated by the possibility of higher costs being passed on to consumers, impacting sales and profitability.

The impact of tariffs on GM is twofold. Firstly, GM's extensive supply chain, which includes operations in Canada and Mexico, would face significant disruptions and increased costs. This is particularly true for parts and components that cross borders multiple times during production. Secondly, GM's sales could be affected by consumers' reactions to potential price increases, as buyers may defer purchases or opt for less expensive alternatives.

In summary, tariff uncertainty poses a high risk to GM as an investment option. The potential for sudden tariff changes and the complex nature of the automotive supply chain make it difficult for companies like GM to adapt quickly. This uncertainty can impact investment decisions, business operations, and consumer behaviour, ultimately affecting GM's financial performance and stock price.

Risk of GM defaulting

In 2025, investors saw a higher risk of General Motors (GM) defaulting on its debt. Costs to insure GM debt against default rose to a record high, and its stock slumped to a 53-year low. This was driven by investment bank Goldman Sachs urging investors to sell its stock, warning that the car maker would need additional capital. The cost to insure GM's debt with credit default swaps rose to 33.5% upfront, or $3.35 million per year for five years to insure $10 million in debt, indicating a high level of risk.

The outlook for GM's ability to raise additional capital was uncertain, with a tight market for high-yield corporate bonds and loans. This situation led to concerns about GM's liquidity and the potential for a bankruptcy risk. Despite assurances from GM's Chief Executive, Rick Wagoner, that the company had sufficient liquidity, investors priced in a 75% chance of default over five years.

The risk of GM defaulting was further exacerbated by the company's reliance on large cars, which were its main source of income. Betting against the market was challenging due to the absence of signs of a quick economic turnaround or a decline in oil prices that could revive demand for large cars. Fitch Ratings highlighted the possibility of a "serious strain of liquidity" for GM if unfavourable economic conditions persisted through 2009.

In addition, GM's stock price performance contributed to the perception of risk. On January 8, 2025, the stock price fell by -1.89%, and it was considered a sell candidate by analysts. The stock exhibited negative signals, and it was expected to perform weakly in the following days or weeks.

Overall, the combination of factors such as the need for additional capital, liquidity concerns, market conditions, and stock price performance, heightened the risk of GM defaulting on its debt obligations.

GM's stock performance

General Motors (GM) stock has experienced fluctuations in recent years, with a mix of positive and negative signals. On January 8, 2025, the stock price fell by -1.89%, and it was considered a sell candidate with a negative evaluation. However, in the following days, GM stock outperformed competitors on strong trading days.

On February 2, 2025, analysts gave GM stock an average rating of "Buy," with a 12-month stock price forecast of $61.71, representing a 24.77% increase from the latest price. This positive outlook came despite GM ending its Cruise robotaxi development program, which was expected to save the company up to $1 billion annually.

GM's financial performance in 2024 showed a revenue increase of 9.08% compared to 2023, with a total revenue of $187.44 billion. However, earnings decreased by -28.26% to $7.19 billion.

In terms of investment risk, there are some concerns about GM's ability to raise capital and the potential impact of tariffs on its stock performance. Tariff uncertainty has punished the stock despite strong guidance for 2025. Additionally, there is a higher risk of GM default, with credit investors pricing in a 75% chance of default on its debt in the next five years.

Despite these challenges, GM has a competitive lineup across all segments, a reduced cost base, and a healthy North American unit. The company's earnings potential is considered excellent, and it is making strides in the electric vehicle market, with EVs becoming "variable profit positive" in 2024.

GM's liquidity

Liquidity refers to the ease with which an asset or security can be converted into cash without affecting its market price. It is important for companies to have enough liquidity to cover their short-term obligations and avoid a liquidity crisis.

General Motors (GM) has been reported to have sufficient liquidity to carry it through the year and has financial flexibility beyond that. As of 30 September 2024, GM had a robust liquidity position of $40.2 billion in total automotive liquidity, including $23.7 billion in cash and cash equivalents.

In addition, GM Financial, the wholly-owned captive finance subsidiary of General Motors, reported total available liquidity of $34.1 billion as of 31 March 2024. This consisted of $5 billion in cash and cash equivalents, $25.4 billion in borrowing capacity on unpledged eligible assets, $0.7 billion in borrowing capacity on committed unsecured lines of credit, $1 billion in borrowing capacity on the Junior Subordinated Revolving Credit Facility from GM, and $2 billion in borrowing capacity on the GM Revolving 364-Day Credit Facility.

Despite GM's assurances of sufficient liquidity, credit investors have priced in a high chance of default on its debt in the next five years. This has resulted in a slump in the stock price and a rise in the cost of insuring GM's debt against default.

Liquidity ratios are a class of financial metrics used to determine a company's ability to pay off current debt obligations without raising external capital. Common liquidity ratios include the current ratio, quick ratio, and days sales outstanding. These ratios are useful for investors, creditors, analysts, management, and regulators in assessing a company's financial health and risk level.

While liquidity is important, it is not the only factor to consider when evaluating a company's financial health. Profitability ratios, such as return on investment (ROI) and return on equity (ROE), are also crucial in understanding a company's ability to generate profits.

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