• Thu. May 19th, 2022

GM stock is a buy, though the company needs to do more to challenge Tesla

ByLinda W. Smith

May 7, 2022


General Motors

has big ambitions and cheap stock. This could be a winning combination for investors. But to achieve this, the pace of the giant automaker’s electric car launches must catch up with the speed of its statements about them.

Investors give less credit to slides and press releases, says Credit Suisse auto analyst Dan Levy, who has an outperform rating on GM, with a price target of $58, about 45% above its current price below $40. “The message from investors is to show us the volume of electric vehicles and a compelling product that shows you can challenge Tesla in an electric vehicle world.”

The company defends its deliberate EV rollout pace, pointing to its long development of a vehicle platform suitable for its innovative Ultium battery system. “We took the time to get it right,” said GM chief financial officer Paul Jacobson. Barrons. “Ultium gives us the infrastructure to support multiple vehicle segments with the same battery platform. This allows us to scale with an efficiency that no one else can replicate. »

Jacobson recently bought $1.4 million worth of GM stock on the open market at around $39. “The purchase speaks for itself. I think GM is undervalued and a great investment,” he says.

By 2030, General Motors aims to double its annual revenue to around $300 billion, with 40-50 percent of its automotive revenue coming from electric vehicles and $50 billion from sales of robo-taxis and other businesses within its Cruise autonomous vehicle unit.

Nothing close to that is factored into the automaker’s depressed stock (ticker: GM), which has fallen about 33% this year and isn’t much above its public offering price. initial price of $33 after the 2010 bankruptcy. GM trades for six times projected earnings of around $7 per share in 2022 and 2023, one of


S&P500

the lowest price/earnings ratios in the index. Its $60 billion market capitalization compares to $1 trillion for


You’re here

(TSLA).

“The stock is very attractive. GM doesn’t get much credit,” says Joe Pittman, an analyst at Harris Associates, one of GM’s top 10 holders through its Oakmark funds. “Its automotive core business is doing well in a dynamic and complex environment, and it is well positioned in electric vehicles and autonomous vehicle technology that will grow over time.”

[Investors’] message is: Show us the volume of EVs and a compelling product that shows you can challenge Tesla in an EV world.


— Dan Levy, Automotive Analyst at Credit Suisse

Why, then, is GM trading so cheap? On the one hand, investors fear that the robust conditions in the auto market will cool later this year as the Federal Reserve raises interest rates. GM also faces higher costs – $5 billion – related to raw materials and supply issues. Affordability is also an issue, with the average selling price of a GM vehicle now at $50,000, up 25% over the past two years. And GM pays no dividends or buys back shares.

But the bigger problem is clear: Wall Street is increasingly pricing automakers on how they are challenging Tesla and heading towards a future in which electric vehicles will dominate sales.

On this point, GM has spoken a lot, while Tesla, with its Model 3 and Model Y, and


Ford engine

(F), with its Mustang Mach-E and F-150 Lightning, has done a lot. But that is about to change.

Sales of the GMC Hummer electric pickup have begun. (GM has a total of 65,000 reservations for it and a companion sport utility vehicle.) On May 19, Cadillac begins taking orders for its Lyriq SUV, for deliveries starting this summer. Recently, Chevrolet restarted the assembly lines of its Bolt sedan and a new Bolt SUV; production had been halted since November for a battery recall. Chevy also has 140,000 reservations for its Silverado electric pickup, although deliveries won’t begin until next year when GM’s electric vehicle launch really picks up speed with the introduction of electric versions of the Chevy Equinox crossover. , the Chevy Blazer SUV and the Hummer SUV. And BrightDrop, an under-the-radar GM electric van unit, opened its first dealership in December near Los Angeles with customers including


walmart

and


fedex
.

Company / Symbol Recent Price Change since the beginning of the year Market value (bil) 2022F Rev (bil) 2022E EPS 2022E P/E 2023E P/E
General Motors /GM $39.95 -31.9% $58.2 $152.3 $7.03 5.7 5.7
Ford engine /F 14.53 -30.0 58.4 145.7 1.96 7.4 6.5
You’re here / TSLA 873.28 -17.4 1,036 87.0 11.90 73.4 55.9

E=estimate

Source: Bloomberg

All Bolt models, which use an older type of battery, are equipped with the Ultium Modular Vehicle Platform which allows the batteries and drive components to be configured in a variety of ways, with the aim of providing maximum performance. autonomy, power and reliability for a specific application. . With that in mind, GM is building four battery plants in the United States, the first to open this summer.

Financing all of these projects will be expensive. Of the company’s $9 billion to $10 billion in annual capital expenditure, 80 percent is for electric vehicles and autonomous vehicles. But GM should be able to handle the tab. Despite chip shortages and other supply issues, General Motors’ first quarter was one of its best ever, with earnings of $2.09 per share. That beat the consensus estimate by about 40 cents, and the company raised its 2022 earnings forecast by 25 cents, to $6.50-$7.50 per share.

But that revenue comes almost entirely from SUVs and pickup trucks with internal combustion engines. While funding GM’s EV transition, the ICE business isn’t getting much value from investors.

GM’s balance sheet is in very good shape, with $17.7 billion in cash, excluding its finance unit, and about $1 billion in net cash (cash less debt) as of March 31. healthcare obligation.

GM’s stake in Cruise (worth about $15 billion, according to Wall Street analysts), its financial unit and its stake in a Chinese subsidiary could be worth 75% of GM’s total market value, which which means that its main automotive business is assessed only once. projected pre-tax cash flow for 2022.

Cruise is a leader in autonomous vehicle technology and could deploy robot taxis for paying customers in San Francisco later this year, marking an industry first. A goal of $50 billion in revenue by 2030 is a huge push, but if GM can demonstrate success in San Francisco, it could boost the stock.

The proof of the pudding, however, will be in the numbers. Hampered by the Bolt production shutdown, GM sold just 475 electric vehicles in North America in the first quarter, while Tesla delivered more than 300,000 worldwide.

Investor Ross Margolies of Stellam Investment Management says GM’s story is simple. It depends on “if you think they can run in electric vehicles”. He is optimistic that GM will succeed.

The last test of this has begun. General Motors aims to sell 400,000 electric vehicles in North America in 2022-23, with most sales weighted toward next year. And it plans to produce one million by 2025. Given its pipeline of electrical products, its chances of hitting those targets look good. The race, as any schoolboy knows, sometimes comes down to the tortoise, not the hare.

Write to Andrew Bary at andrew.bary@barrons.com


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