As Mary Barra, Common Motors Co. (NYSE:GM) chair, expressed with beautiful understatement in the course of the second-quarter earnings name with analysts on July 26: “That is a very distinctive and dynamic market that presents each challenges and alternatives for GM.”

GM has constructed roughly 90,000 automobiles – most likely price upwards of $Four billion – that may’t but be shipped to sellers as a result of a number of components (usually, semiconductor chips) are missing. GM sellers, in the meantime, have solely a ten-to-twenty day provide of automobiles, most likely a 3rd of what they should meet client demand.

Tight retail stock

In such an surroundings, GM and the sellers are capable of promote automobiles at full mark-up, thereby producing sturdy profitability. However the whole money generated is down sharply – and that money is required to pay mounting payments for battery electrical car (BEV)-related investments equivalent to the brand new Ultium Cells LLC plant in Lordstown, Ohio that can provide GM’s Detroit meeting plant that builds the brand new GMC Hummer EV. Between 2020 and 2025, GM is concentrating on $35 billion in capital, engineering and improvement prices for brand new applied sciences together with BEVs, autonomous automobiles and hydrogen gasoline cells.

The prospect for strong BEV gross sales seems to be constructive, by one measure, with greater than 80,000 “reservations” for Hummer pickup and SUV fashions; 150,000 reservations for Silverado EV in 2023 and different BEV fashions equivalent to Cadillac Lyriq, Chevrolet Blazer EV and Chevrolet Equinox EV due by way of 2023. BrightDrop Zevo business van manufacturing is because of begin later this yr at GM Canada and Cruise is piloting business fee for robotaxis in San Francisco.

Within the meantime, GM is including debt to bolster its funds, apparently to cowl a drop in money brought on by short-term shortages of saleable automobiles to ship to sellers. A $2.5 billion Division of Vitality mortgage to the GM three way partnership constructing the Ohio plant – in addition to future crops in Tennessee and Michigan – will come from the division’s Superior Know-how Automobiles Manufacturing program, which offers loans to help U.S. manufacturing of light-duty automobiles, components and different supplies that enhance gasoline economic system.

Money from DC

Phrases of the federal government mortgage haven’t but been disclosed; GM beforehand introduced that the Ohio plant represented a $2 billion funding, which was to have been financed internally. With battery expertise strongest in the meanwhile in China, South Korea and Japan, Vitality Secretary Jennifer Granholm, a former Michigan governor, stated: “As electrical vehicles and vehicles proceed to develop in recognition inside america and around the globe, we should seize the possibility to make superior batteries — the center of this rising trade — proper right here at house.”

On Jul 28 GM stated it was saying the pricing of two sequence of senior unsecured mounted fee notes totaling $2.25 billion. The so-called “Inexperienced Bonds” embrace $1 billion of 5.40% notes due in 2029 and $1.25 billion of 5.60% notes due in 2032. They’re designed to assist fulfill GM’s environmental, social and governance (ESG) objectives, together with carbon impartial operations by 2040.

The $4.75 billion of recent debt comes on the heels of a second quarter monetary report. GM’s web revenue within the second quarter fell to $1.6 billion ($2.Three billion on an EBIT-adjusted foundation) from $2.eight billion ($4.1 billion on an EBIT-adjusted foundation) a yr earlier.

GM’s capital expenditures rose to $2.1 billion within the quarter from $1.5 billion a yr earlier. With web automotive money from working actions falling to $3.5 billion for the quarter from $Four billion a yr in the past, adjusted automotive free money movement fell to $1.Four billion from $2.5 billion. In different phrases, on a quarterly foundation GM’s capex rose 40% YOY whereas adjusted free money movement fell 44% — setting the stage for securing further debt.

Given the backdrop of rising rates of interest, GM’s initiative to safe debt earlier than it turns into extra expensive may show prudent. As Barra famous in the course of the earnings name:

“Whereas demand stays sturdy, there are rising considerations concerning the economic system to make certain. That’s why we’re already taking proactive steps to handle prices and money flows, together with lowering some discretionary spending and limiting hiring to important wants and positions that help progress.”

Tight credit score forward

Barra is exercising prudence. Whereas the provision of semiconductors and different components could enhance within the second half, the economic system has proven indicators of recession and will weaken additional because the Federal Reserve tightens credit score so as to stanch inflation. Political uncertainty is rising as nicely, with federal cash for EV client incentives and charging infrastructure trying much less beneficiant following the sinking of the Democrats’ Construct Again Higher spending package deal.

The lesson from the runup to GM chapter’s in 2009 is that extreme debt can sink any firm, even (or particularly) a behemoth with a legendary identify and popularity. If Barra and her contemporaries discovered something, they actually discovered that sustaining a stable stability sheet and credit standing are key survival ways for any enterprise – they usually’ve endeavored to let traders know they obtained the message.

GM’s technique relies on enough money movement from inner combustion engine (ICE) automobiles – principally the Silverado pickup – help the huge funding in BEVs, autonomous tech and gasoline cells. Because the transition takes place over the subsequent decade or so, GM tasks that income and money movement from electrified merchandise like Silverado EV, Blazer EV and Cadillac Lyriq will exchange that produced by right now’s merchandise.

The danger to traders in GM widespread is that imprudent borrowing habits from the previous will return, loading down GM with debt, compromising its credit standing and leaving it weak to unexpected catastrophes such because the World Monetary Disaster. The timetable for widespread acceptance of BEVs stays murky – it’s nonetheless not clear how quickly common shoppers will probably be buying and selling of their ICE automobiles for plug-ins.

GM shares proceed to promote roughly for a similar $33 a share they did at their preliminary public providing in 2010. With money tight, GM can in poor health afford to pay a dividend. (Cross-town rival Ford Motor Co. (F) has restored its dividend and raised it to its pre-COVID fee.)

GM, on this author’s opinion, stays a HOLD. Homeowners of GM shares don’t face a lot draw back danger on the present value within the low 30s. The exception could be if the automaker steps up borrowing – and debt rises precipitously – with out an adjustment within the firm’s funding spending on BEVs and different superior expertise.

GM bonds barely qualify as funding grade. Credit standing companies will probably be watching GM carefully, so traders should take note of the raters for any proof of stability sheet weakening.