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General Motors (GM): New Trucks Involve Some Risks, But Potentially Larger Rewards

 December 17, 2012 10:07 AM

(By Mani) General Motors Corp. (NYSE: GM) recently introduced its new 2014 Pickup Trucks. Visually, this generation is not a large leap from the current version but may reap rewards in the long run.

GM unveiled 2014 Chevrolet Silverado 1500 and GMC Sierra 1500 featuring the all-new EcoTec3 engines. The new engine family includes a 4.3L V6, a 5.3L V-8 and a 6.2L V-8.

EcoTec3 engines feature direct fuel injection, cylinder deactivation and continuously variable valve timing to make the most of power, torque and efficiency across a broad range of operating conditions, and is expected to generate 10 percent fuel economy gains.

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Upgrades to the interior, suspension, ride, connectivity and power appear to be more significant while other improvements such as a 5 percent reduction in drag and electric steering should also be accretive.

"Investors may be a bit disappointed that there is no small turbocharged V6 gas or diesel engine. We'd point out that the cylinder deactivation feature essentially provides the same result (i.e. lower displacement and fuel consumption when not needed, and power in reserve when needed)," Deutsche Bank analyst Rod Lache wrote in a note to clients.

Meanwhile, skeptics may argue that is a risky strategy for GM to launch a new pickup chassis and a new set of engines at the same time. Ford re-designed its chassis in late 2008 and upgraded engines in early 2011. However, GM wouldn't have taken this risk if the fuel economy, power, and towing improvements were not very meaningful.

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Bottom line is that there was nothing earth shattering in this unveiling. GM is keeping some of the specific improvements such as fuel economy and torque figures under wraps until they get closer to the launch, so as not to cannibalize the current product.

For reference, GM's current 3 engine options get 18-21 miles per gallon (mpg) on the highway, compared to Ford's 16-21 for its 4 options.

"We continue to believe that there is a very large base of loyal GM Pickup buyers that will step up to this vehicle, and that the new truck will be very helpful to GM's earnings. And we now expect further advancements (i.e. an 8 speed transmission) to counter future upgrades of competitive products.," Lache said.

GM's plant capacity for the entire K2XX platform will be 1.15 million in 2014. If the pickup segment share increased by 100 basis points and GM gained its typical 380 basis points of share within the segment, it would fill this capacity, generating $1.5 billion of incremental EBIT. This excludes any impact from price improvement as GM is currently at a $2k-$3k price disadvantage to Ford, making it $2.3 billion to $3.45 billion when averaged over 1.15 million units.

"The Street may be surprised on how much GM pickup inventory may decline: GM truck inventories declined by 40 days from November to December of 2011 and we expect this year to be at least as big," Lache added.

The next potential truck-related catalyst will be monthly sales/inventory trends reported Jan. 3, 2013.



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