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Despite a Downgrade, General Motors' Shares Are Surging Today

By John Rosevear – Apr 7, 2020 at 2:03PM

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This is why investors are scooping up GM's stock.

What happened

Shares of General Motors (GM -3.52%) were surging on Tuesday afternoon, as an analyst's pessimistic downgrade failed to dent investors' growing optimism about GM's prospects once the coronavirus pandemic fades.

As of 1:30 p.m. EDT, GM's shares were up about 12.6% from Monday's closing price.

So what

In a note on Tuesday morning, Deutsche Bank analyst Emmanuel Rosner downgraded GM from the equivalent of buy to hold and cut his price target for the shares from $41 to just $25.

Rosner's concerns centered on GM's rate of cash burn while its factories in North America are shut down. While both GM and rival Ford Motor Company (F -2.35%) have well over $20 billion in cash, Rosner estimates that those cash hoards will last just 15 to 17 weeks with factories idled.

Barra is shown on a factory floor, wearing safety glasses and a mask.

CEO Mary Barra at GM's improvised face-mask factory in Warren, Michigan. GM expects to ship its first batches of masks this week. Image source: General Motors.

(Like most automakers, GM records revenue when it ships vehicles to dealers; with factories shut down, there aren't any shipments at the moment.) 

But auto investors seemed much less concerned than Rosner on Tuesday. There's a counterargument to be made that the effects of a lengthy shutdown are already priced into GM's shares, which even with today's rally are still down almost 30% since the beginning of March. 

And with signs emerging that the U.S. may be near the peak of the pandemic, and that social-distancing measures imposed since mid-March are having a positive effect, investors have some reasons to think that perhaps GM will emerge from the pandemic in better shape than they might have expected a week or two ago.

Now what

With auto production suspended, GM (like Ford) has turned to making medical equipment and supplies to support healthcare workers and first responders on the front lines of the COVID-19 outbreak. That won't generate much (if any) revenue, but -- in addition to being the right thing to do -- those efforts have already won some genuine goodwill for the company. 

But how is GM doing right now, really? It's not easy to tell, not least because CEO Mary Barra and her team are still working through the cost cuts and new-product delays that will help reduce the company's cash-burn rate. 

I expect we'll get a comprehensive update no later than May 6, when GM is scheduled to report its first-quarter earnings results.

John Rosevear owns shares of Ford and General Motors. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

General Motors Company Stock Quote
General Motors Company
GM
$32.09 (-3.52%) $-1.17
Ford Motor Company Stock Quote
Ford Motor Company
F
$11.20 (-2.35%) $0.27

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