Why General Motors Company Shares Could Stall

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of General Motors  (NYSE: GM  ) slipped about 1% in pre-market trading Friday after the auto giant's second-quarter earnings report yesterday prompted a downgrade from Deutsche Bank.

So what: Along with downgrading GM from buy to hold, analyst Rod Lache reiterated his price target of $41, representing about 15% worth of upside to yesterday's close. So while contrarian traders might be attracted to GM's earnings-related pullback Thursday -- quarterly earnings plunged 80% on massive recall expenses -- Lache's call could reflect a sense on Wall Street that the automaker's headwinds are just too strong to allow for a significant rebound.

Now what: Deutsche offered three reasons for the downgrade: a deceleration in contribution margins, lower free cash flow, and most importantly, uncertainty over GM's longer term outlook. "With limited free cash flow support for valuation through 2015, we are looking into potential drivers of valuation in 2016 and beyond. At this point we don't see compelling drivers of multiple expansion in this timeframe," said Lache.

Of course, when you couple GM's still substantial progress in North America and Europe with its suddenly weak stock price -- shares are now off about 15% from their 52-week high -- those concerns might provide patient Fools with a juicy decade-long income opportunity.

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  • Report this Comment On July 26, 2014, at 7:32 AM, funfundvierzig wrote:

    60 recalls, 30 million-plus defective GM cars. But those shoddy-designed and built cars are practically all in the United States.

    Given the global sharing of design, engineering, and parts and subsystems, will there be massive recalls mandated for defective GM cars and trucks in Europe? China? South and Latin America?

    Stay tuned. The mendacious Management of GM is only in the third or fourth inning of their waxing colossal consumer product fraud and cover-up.

    ...funfun..

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