Two months ago, General Motors (GM) was our pick for Stock of the Week. Since then, the stock is up a modest 5%, yet the bull case has actually gotten stronger.
That’s because they had a blowout earnings report which marked the company’s 10th straight quarter of topping expectations, continued progress on its electric vehicle (EV) and autonomous vehicle (AV) units, and a major, table-pounding upgrade from one of the top auto analysts on Wall Street.
At the same time, its valuation remains attractive, and the company is well-positioned to benefit from the burst in economic activity we will experience in the second half of this year. In recent weeks, the stock encountered some resistance at the $60 level which is creating another attractive, entry point.
So, let’s consider this the rare sequel that outshines the original (with the obvious exception of Empire Strikes Back). Now, let’s dig deeper into the latest developments for GM in addition to reviewing the positive fundamentals.
GM’s legacy car business is in great shape. This was made clear with its recent earnings report in which the company topped expectations on the top and bottom-line. For the quarter, GM reported $3.7 billion in profits which was a significant improvement from last year’s $105 million profit during the same quarter.
Given recent economic data, 2021 and 2022 auto sales will be quite strong. Car sales have been below average levels for the last couple of years which implies some sort of rebound effect. Further, the average car on the road is now 12 years old with 25% of vehicles older than 16 years old. The combination of an improving economy, stimulus payments, solid household balance sheets, and low-interest rates are also supportive of demand.
Just based on this factor, GM is quite attractive at current price levels, however, the stock has more upside given its exposure to EVs and AVs. The company is planning to invest $27 billion in these units in the coming years.
It’s also important to note that GM has a better chance to succeed in EVs than many of the startups on the scene. It can internally fund investment, while these companies have to tap markets. Second, it already has the production capacity and distribution channels which is proving to be a formidable challenge for the upstarts.
Typically, there’s a trade-off between growth and value. Yet, GM is a rare exception. It features a forward PE of 9.6 which is significantly cheaper than the S&P 500’s at 23.
Wall Street is starting to pay attention. The stock has an average price target of $67, implying a 15% upside. Out of 23 analysts covering the stock, 21 have a buy rating.
One of the top auto analysts, Morgan Stanley’s Adam Jonas recently hiked his price target to $80. Jonas was one of the first to recognize that Tesla (TSLA) was going to be a big deal and had been bullish on the stock for most of its run. However, in recent months, he’s replaced TSLA with GM as his top pick in the sector due to its valuation and upside potential. He thinks the stock could eventually reach $120 if the company decided to spinoff its various units as their entities.
The company also has a strong management team. This is highlighted by the company’s 10th straight quarter of topping expectations as well as remaining profitable during the pandemic. In a recent interview, Jonas said “What [GM CEO] Barra and her team are doing maybe one of the most profound strategic turnarounds not just in the auto industry but all of the business.”
Given the growth in its legacy car business and the future upside of EVs and AVs, it’s not surprising that GM has a B for its Growth rating. Wall Street analysts have been hiking 2021 EPS estimates by 45% and 2022 EPS estimates by 25% in recent months. In the near-term, the company is a beneficiary of the business cycle, while in the long-term, it’s poised to capture market share in EVs and AVs.
GM also has a Momentum rating of B. In recent months, it’s outperformed due to the rotation into value and cyclical stocks. However, GM’s momentum goes beyond just price action. The company has adeptly navigated the pandemic, and it’s managing through the recent, chip shortage with limited impact on its high-margin SUVs and trucks.
Putting It All Together
Again, GM would be a great stock at its current valuation just with its legacy car business. However, the stock has a free call option embedded in it due to its exposure to AVs and EVs.
Both are likely to grow into trillion-dollar industries of their own. Given GM’s pedigree and early-mover advantage, they are likely to carve out a significant piece of market share. As investors become aware of this, the stock will likely experience some multiple-expansion as well in addition to earnings growth.
At a minimum shares should be trading at $80 given the current earnings outlook. However, the more investors see them as a cheaper EV play than Tesla and get even a small dose of that attention, then shares could easily be soaring above $100 in the year ahead. That makes it a downright steal as it wallows under $60 today.
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GM shares were trading at $58.13 per share on Monday afternoon, down $1.69 (-2.83%). Year-to-date, GM has gained 39.60%, versus a 4.97% rise in the benchmark S&P 500 index during the same period.
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