RBC: There's a simple reason why David Einhorn's GM proposal is a 'non-starter' (GM)
General Motors stock price has given back most of its gains since the start of 2017. After what looked like a breakout, GM remains stuck in the range between $28 and $40 that has been in place since 2013.
On March 28, activist investor David Einhorn, president of Greenlight Capital, proposed splitting GM stock into two classes in an effort to spur investor interest.
The proposal would split GM stock into a dividend income class for investors looking for a steady stream of income and a capital appreciation class for investors seeking growth.
In a note sent out to clients on Wednesday, RBC's equity research team led by Joseph Spak called the proposal a "non-starter" for one simple reason: The dividend class would be treated as a debt instrument and lead to a lower credit rating for the company.
Why would this be bad? Well RBC sees a series of ramifications:
Moody's and S&P have called the structure credit negative... If GM lost their investment grade rating, we see ramifications. The big issue surrounds the captive finance company which is viewed as sub to the motor company so sub-IG would impact GMF's competitiveness. GM estimates it would increase GMF's unsecured debt (which total $40bn) cost of funding by ~100bps. A less competitive captive could impact GM's auto growth. Finally, sub-IG would require a higher minimum cash level (GM estimates by $5-$10bn) to their current $18bn target which eats into the FCF bull thesis.
RBC is urging investors to take a cautious approach to North American automakers overall. The analysts believe that the US auto cycle is already in the late stages and that there is currently more downside risk than upside potential.
The bank also does not see how GM could push its margins higher than the 10%+ estimates that currently exist.
RBC has a "Sector Perform" rating on GM stock and a $37 price target, GM closed March 28 at $35.56 a share.
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