General Motors Stock Forecast: Price Targets and GM Stock Analysis

📈 Trade Details

Considering a straight-out GM Stock purchase at $46.26 (the price at the time of writing). 

🗒️ Quick Summary

NYSE Ticker: GM

General Motors Company is a leading automotive manufacturer that designs, builds, and sells a wide range of vehicles, including trucks, cars, and crossovers, along with automobile parts and accessories. The company operates through various segments, including GM North America, GM International, Cruise, and GM Financial. Its vehicle brands include Buick, Cadillac, Chevrolet, GMC, Holden, Baojun, and Wuling. GM also provides automotive financing, insurance services, and develops autonomous vehicle technology.

🔥 What’s trending right now?

Strong Q2 2024 Earnings: GM reported a robust financial performance for the second quarter of 2024, highlighting record revenue and a significant increase in EV deliveries. The company achieved a 40% year-over-year growth in U.S. EV deliveries, outperforming the industry average of 11%. This growth is attributed to the successful scaling of their EV portfolio, including models like the Chevrolet Blazer EV and Cadillac LYRIQ.

Focus on EV Production and Profitability: GM is committed to achieving positive variable profits from its EV portfolio by the fourth quarter of 2024. The company is strategically managing production levels and has plans to ramp up EV manufacturing while maintaining strong pricing and margins. They are also working on improving battery cell costs and production efficiency.

Cruise Autonomous Vehicle Developments: GM's autonomous vehicle division, Cruise, has resumed operations in several cities, including Houston and Phoenix. The company is focusing on enhancing the safety and performance of its autonomous technology, with plans to simplify the path to scale by using the next-generation Chevrolet Bolt EV for its robo-taxi business.

Challenges in China: GM continues to face challenges in the Chinese market, reporting a loss in equity income from its joint ventures. The company is taking steps to restructure its operations in China to improve profitability, including aligning production with demand and reducing inventory levels.

Stock Buyback Program: GM has been actively repurchasing shares, with a recent authorization of an additional $6 billion for stock buybacks. The company believes its stock is undervalued and aims to reduce its share count significantly.

Labor Negotiations: GM is currently engaged in negotiations with the United Auto Workers (UAW) regarding labor contracts. The company is focused on reaching an agreement that balances employee compensation with the need for competitive pricing and profitability.

🎯 What do we expect?

If the expected Earnings Growth materializes, the expected return is 40.81% in 2025 or 31.23% annualized.

🎯 What analysts think (Stock Price Forecast):

Avg. Price: $55.01 (+19%)
Highest Price:  $85 (+83%)
Lowest Price: $33 (-28%)

At the current price, GM stock offers a great margin of safety in the 19%+ range, which puts the stock in the buy zone for me if we trust analyst consensus estimates.

🎯 What do financial models think:

Avg. Price: 43.84 (-5.7%)

Breakdown by Model:

• PB Multiples: $49.64 (7.31%)

• PS Multiples: $52.17 (12.78%)

• P/E Multiples: $53.81 (16.32%)

• EBITDA Multiples: $45.98 (-0.61%)

• Revenue Multiples: $54.56 (17.94%)

• EBIT Multiples: $48.42 (4.67%)

• 5Y DCF EBITDA Exit: $27.10 (-41.42%)

• 5Y DCF Growth Exit: $35.50 (-23.23%)

• 5Y DCF Revenue Exit: $35.89 (-22.43%)

• 10Y DCF Revenue Exit: $22.40 (-51.58%)

• Dividends: Multi-Stage: $33.28 (-28.06%)

• Dividends: Stable Growth: $67.31 (45.52%)

Main reason for financial models averaing to a lower price is due to lower expected EPS. I will go into details why analysts don't think that is the case.

🕰️ Historical Performance vs. S&P500 ($10k Investment)

Here is the summary of your returns if you invested $10,000 in GM vs. S&P 500 since 2021. GM has severely underperformed vs. SPY. Both pandemic and post pandemic years haven't been great for automakers. 

Major Reasons for Underperformance:

High Capital Expenditures to capitalize on the shift to EVs. Increased liabilities as a result. Supply chain problems didn't help during the COVID years and then followed by crippling inflation & a rise in interest rates that suppressed demand. 

🔮 Future Earnings Expectations

Future earnings expectations are no growth in 2025 and a return to growth in 2026 with the current management's strategy.

The Consensus EPS growth for GM is 0% in 2025 & 5% in 2026.

🚚 Key Drivers of Future Growth

1. Strong Performance and Market Share:

   • Management highlighted that past investments have resulted in a high-performing portfolio of internal combustion engine (ICE) trucks and SUVs, which continues to drive volume, share, and margin growth.

   • #“Our U.S. EV deliveries grew 40% year-over-year in the second quarter, while the industry grew at 11%.” This indicates a strong position in the EV market.

2. Focus on Electric Vehicles (EVs):

   • GM is scaling its EV portfolio effectively, with plans to achieve positive variable profits from EVs by the fourth quarter of 2024.

   • #“Our EV portfolio is growing faster than the market now that our module issues are resolved and we are scaling production.”

3. Product Launches and Innovations:

   • The company is launching several new models, including the Chevrolet Equinox EV and GMC Sierra EV, aimed at capturing market share in the growing EV segment.

   • #“We expect the Chevrolet Equinox EV to be more profitable than the outgoing model.”

4. Cost Management and Efficiency:

   • GM is focused on capital efficiency and margin improvement, with a goal to achieve $2 billion in fixed cost reductions by the end of 2024.

   • #“We have been able to eliminate more than 2,400 unique parts on 10 vehicles we're launching through the first quarter of 2025.” This simplification is expected to enhance margins.

5. Strategic Adjustments in China:

   • Management acknowledged challenges in the Chinese market and is working closely with joint venture partners to restructure operations for profitability.

   • #“We had expected to return to profitability in China in the second quarter. However, we reported a loss, and we expect the rest of the year will remain challenging.”

6. Cruise Autonomous Vehicles:

   • GM is committed to its autonomous vehicle strategy through Cruise, focusing on scaling operations and improving technology.

   • #“We think all of these are important steps that will help us attract those who believe in the Cruise mission and see the incredible long-term business opportunity of autonomous driving.”

7. Shareholder Returns:

   • GM is actively repurchasing shares, with an additional $6 billion authorized for buybacks, reflecting confidence in its stock valuation.

   • #“Considering our belief that GM's share price is still undervalued, you should expect us to remain active in future share repurchases.”

🐂 Key Bullish Arguments

• Undervaluation: GM is trading at an incredibly low 4.8x forward P/E, significantly below its intrinsic value, making it a potential bargain for investors.

• Consistent Financial Performance: GM has consistently beaten EPS and sales estimates over the past two years, indicating strong operational performance even amid challenging market conditions. Note that analysts have been generally bearish on automotive during this period.

• Share Buybacks: Management has retired over 300 million shares since early 2022 (nearly a quarter of all outstanding stock), which is highly accretive for shareholders and suggests confidence in the company's undervaluation.

• Strong Capital Returns Potential: There is substantial room for increased dividends and share buybacks, given GM's robust cash flow and net income, which could drive shareholder value significantly.

• Solid Earnings Growth Outlook: Both sales and EPS are expected to start growing again in 2026, with GM outpacing the consumer discretionary sector, indicating potential for continued financial strength.

• EV Expansion: GM's electric vehicle (EV) portfolio is growing rapidly, with U.S. EV deliveries increasing by 40% YoY, suggesting the company is well-positioned to capitalize on the shift to EVs.

• Attractive Valuation Metrics: Despite generating $17–$20 billion in cash from operations annually and maintaining stable margins, GM is trading at a low multiple of 5x its cash flow, indicating a significant undervaluation.

• Cruise Autonomous Vehicle Division: GM's autonomous vehicle (AV) segment, Cruise, is progressing, providing a potential growth catalyst for the company's future valuation.

• Potential for Activist Involvement: The low valuation and potential for capital returns make GM an attractive target for activist investors who could push for unlocking shareholder value.

• Dividend Growth Opportunity: The current dividend expenditure is modest relative to GM's income, allowing room for substantial dividend growth, enhancing shareholder returns.

🐻 Key Bearish Arguments

• Weak Consumer Sentiment: The current softness in consumer sentiment, likely due to broader economic concerns, could negatively impact GM's sales and growth, justifying some degree of the stock's undervaluation.

• Earnings Volatility: Despite consistent outperformance, GM’s YoY sales growth has been choppy, reflecting challenges in maintaining consistent financial momentum in a fluctuating market.

• Margins Under Pressure: GM's profit margins have contracted over the past year, and while management expects improvements, there's no guarantee that these efficiencies, especially in the EV space, will fully materialize.

• Risks in GM Financial Division: GM's financial arm could face rising defaults in vehicle financing due to weakening consumer health and a broader economic downturn, which would significantly impact the company's earnings since this division contributes disproportionately to profits.

• Potential Inertia in Capital Returns: There's a risk that GM’s management might remain conservative and avoid boosting capital returns to shareholders, which could limit the stock’s upside despite its low valuation.

• Macroeconomic and Industry Challenges: GM operates in a highly cyclical industry and faces headwinds such as inflation, supply chain disruptions, and rising interest rates, which could hinder profitability and growth.

• Limited Room for Further Valuation Decline: While the current valuation is low, there's a concern that if the market remains bearish or if operational weaknesses emerge, the stock could continue to be "underpriced" for an extended period without a catalyst for revaluation.

• Electric Vehicle Competition: Although GM is growing its EV portfolio, the company faces fierce competition in the EV space, and there’s no guarantee it will achieve the scale or profitability necessary to dominate this market.

• Dependence on Capital Markets: Given the ongoing share buybacks, GM is spending heavily on capital returns, which could become unsustainable if cash flow declines or market conditions worsen.

• Cruise Segment Risks: While the Cruise autonomous vehicle division offers growth potential, the AV market remains uncertain, and setbacks in testing or regulatory challenges could limit this segment's contribution to GM's future valuation.

Key Netgative Future Outlooks from the latest Earnings Call

1. Challenges in the Chinese Market:

   • GM reported a loss in China and expects the rest of the year to remain challenging due to significant excess capacity and a competitive pricing environment. #“We had expected to return to profitability in China in the second quarter. However, we reported a loss and we expect the rest of the year will remain challenging.”

2. Pricing Headwinds:

   • Management anticipates a pricing headwind in the second half of the year, projecting a decline of 1% to 1.5% year-over-year. This is a shift from the essentially flat pricing seen in the first half. #“Our guidance assumes pricing to be down 1% to 1.5 year-over-year in the second half versus essentially flat in the first half.”

3. Increased Costs:

   • Approximately $1 billion of costs are expected to be second-half weighted, including about $400 million in higher marketing spend and increased commodity prices, particularly for copper and aluminum. #“Roughly $1 billion of costs are second-half weighted. This includes about $400 million higher marketing spend to support more launches in the back half of the year.”

4. EV Profitability Concerns:

   • While GM aims to achieve variable profit from its EV portfolio by the fourth quarter, there are concerns regarding the lower variable profit margins associated with EVs compared to the overall portfolio average. #“As a result, the mix will be a bigger headwind in the back half of the year, as EVs have a variable profit lower than the portfolio average.”

5. Regulatory Uncertainty:

   • The potential changes in the regulatory environment, particularly regarding EV mandates, could impact GM's strategy. Management acknowledged the uncertainty but emphasized their flexibility in adapting to market demands. #“We do think the market for EVs will continue to grow... regardless of what the regulatory environment is.”

6. Cruise Operations:

   • The decision to pause production of the Cruise Origin resulted in a charge of roughly $600 million, indicating financial strain in the autonomous vehicle segment. #“The decision to pause the production of Cruise, Origin triggered a charge of roughly $600 million.”

7. Inventory Management:

   • GM acknowledged the need to closely monitor EV demand and inventory levels, indicating potential risks if customer deliveries lag behind wholesales. #“We continue to monitor EV demand and inventory levels very closely.”

8. Market Competition:

   • The competitive landscape in the automotive industry, particularly in China, poses risks as many companies prioritize production over profitability, leading to unsustainable pricing pressures. #“Very few people are making money, and a lot of OEMs are prioritizing production over profitability.”

Conclusion

Okay, so that's a lot of negatives and a lot of positives. GM needs to figure out China. But the company is an incredible money-making machine, producing $18B in Operating Cashflows a year. This is not expected to change in the near future. Historically, the company trades roughly 4x P/OCF and 6x P/Adj. Earnings. Currently, it trades at 4.9x P/E and 2.7x P/OCF. At the current valuation, it is no wonder management is buying back shares. They see the chronic undervaluation as an opportunity. If the price drops further, I will be averaging down and adding at the current price.

Disclaimer

I currently do not have an active position in any of the companies mentioned above, but I am thinking of initializing in the next few days. As usual, the information provided in this newsletter is for general informational purposes only. All information in the newsletter is provided in good faith. However, we make no representation or warranty of any kind, express or implied, regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information. The content of this newsletter does not constitute financial advice, investment advice, or any other type of advice and should not be relied upon for any individual circumstances. We are not financial advisors, and you should consult with a professional before making any investment decisions. Any action you take upon the information in this newsletter is strictly at your own risk, and we will not be liable for any losses and/or damages in connection with the use of our newsletter.

Happy Investing,
Andy