The Road Traveled
General Motors (GM) has reached impressive 52-week highs, soaring 22.5% this year, overshadowing the S&P 500 Index ($SPX). In a twist of fate, Tesla (TSLA) finds itself as the S&P 500’s worst performer, while other electric vehicle (EV) companies are treading dangerously close to record lows.
A Clear Divide Emerges
Recent times have seen a stark contrast in fortunes between traditional automakers and pure-play EV companies. Legacy automakers exude optimism over earnings and demand, while EV companies face signs of tepid demand.
Moving forward, the narrative involves intriguing plot twists. Tesla has cautioned of a potential deceleration in delivery growth for the year, anticipating a notable drop from 2023. Amidst a looming air of bankruptcies, Fisker (FSR) languishes on the edge, failed talks with a major automaker causing a delisting from NYSE.
The GM Advantage
Despite GM stock hitting all-time highs, it still holds an aura of affordability and the promise of a potential doubling. Here’s the basis of this remarkable stance.
Charting the Course
During the Bank of America 2024 Global Auto Summit, GM’s CFO, Paul Jacobson, accentuated the company’s low valuation multiple, drawing emphasis multiple times during the proceedings. A closer look at GM’s 2024 guidance unveiled during the Q4 earnings call throws light on the company’s expectations.
GM aims to attain a net income between $9.8 billion and $11.2 billion in 2024, with adjusted earnings per share (EPS) projected to range between $8.50-$9.50. An intriguing divergence stems from the massive $10 billion share buyback from last year, estimated to elevate the 2024 EPS by $1.45, painting a rosy picture for the stock.
Further scrutiny reveals GM’s anticipation of adjusted automotive free cash flows between $8 billion to $10 billion in 2024, slightly lower than the $11.7 billion recorded previously.
A Glimpse at GM Stocks
GM’s valuation metrics paint an intriguing picture:
- GM boasts an NTM price-to-sales multiple of 0.29x, a dip from the average of 0.39x over three years.
- GM’s NTM price-to-earnings (PE) multiple stands at 4.9x, a substantial markdown from historical averages. The numbers also fall below hometown rival Ford’s (F), trading at an NTM PE multiple of 6.65x.
- The NTM market cap to free cash flows for GM stands at a modest 6.16x.
The resilience in earnings of legacy automakers juxtaposed against slumping valuations prompts contemplation. GM foresees potentially superior earnings this year, with pricing trends defying expectations.
Perception of legacy automakers hitting peak profitability turmoil, expecting diminishing margins as EV sales elevate, stands juxtaposed against Ford CEO Jim Farley’s assertions on sustained growth. GM’s plans for EV profitability and the introduction of hybrid cars indicate strategic evolution and adaptability in line with market demands.
Analysts’ consensus tags GM with a “Moderate Buy” rating. Among the pool of 21 analysts, 11 shower GM with a “Strong Buy” rating, whereas 2 deem it a “Moderate Buy.” Seven opt for a “Hold” stance, and one raises a “Strong Sell” flag.
The mean target price of $49.40 marks a 12.2% premium from the latest closing figures. A bullish Street-high target price of $95, proposed by Citi, hints at the potential for GM’s stock to more than double from current levels.
The road ahead for GM isn’t devoid of challenges, with setbacks in EV production and subsiding Cruise self-driving business casting shadows. Warren Buffet’s exit from GM stock further muddies the waters on valuation perceptions.
Nevertheless, GM’s current standing as an attractive investment opportunity rings true. Embracing favorable pricing and demand dynamics for ICE cars, along with a pivot towards bolstered shareholder returns through share buybacks or potential dividends, paints a promising future.
While a near-term doubling of GM stock might be ambitious, the prospect of a significant surge over the next two to three years, as valuations realign, appears ripe for the taking.