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General Motors (GM) is among the largest automobile companies in the world, valued at $54.8 billion by market cap. In the last 10 years, GM stock has underperformed the broader markets significantly, returning 50.4% to shareholders. Even if we adjust for dividend reinvestments, cumulative returns for the auto stock stand at 86%, compared to the 243% returns of the S&P 500 Index ($SPX).
However, this massive underperformance means that GM stock trades at a cheap valuation, making it an enticing option for value investors. Notably, HSBC cited the stock's “discounted valuation” when it raised its GM price target on Monday to $58 from $56, and backed a “buy” rating.
The firm also anticipates “further large buybacks” could be possible; last year, General Motors announced a $10 billion stock buyback program and reduced its outstanding share count by 18% in the last 12 months, effectively boosting its earnings per share (EPS). This year, it announced another buyback program totaling $6 billion, aiming to lower the total share count to less than 1 billion.
GM’s strong performance and widening profit margins have now driven the stock higher by nearly 47% in the last 12 months.
However, in a separate Monday note, Bernstein analyst Daniel Roeska downgraded GM stock to “market perform” from “outperform,” and lowered the stock's price target to $53 from $54.50. Roeska said that while GM’s buyback plan temporarily pushed the stock higher, the analyst prefers to “wait and see” if the automobile heavyweight will announce additional capital requirements in early October.
According to Roeska, GM’s increasing inventory balance could force the company to issue discounts to customers, dragging on its bottom line in the process. Additionally, the analyst believes GM’s production target of 200,000 EVs in 2024 is far too optimistic, and expects EBIT targets to be pushed back as a result.
Inside GM's Q2 Numbers
While General Motors generates most of its sales from internal combustion engine (ICE) vehicles, it is also investing in electric vehicles (EVs) to gain traction in an expanding addressable market.
In Q2 of 2024, GM shipped 22,000 EVs, an increase of 40% year over year, allowing the auto giant to report total revenue of $47.97 billion, higher than estimates of $45.46 billion. GM's adjusted earnings of $3.06 per share were also higher than estimates of $2.67 per share.
GM reported its best quarterly sales in over four years, allowing it to generate more than $5 billion in free cash flow in the June quarter.
EVs account for less than 4% of total sales, and the segment remains unprofitable. General Motors forecasts that the EV business should become profitable on a contribution margin basis once it reaches an output of 200,000 vehicles - a benchmark it expects to reach in Q4 of 2024, though Bernstein notes that GM would have to roughly quadruple sales in the last four months of the year to make that happen.
General Motors is experiencing slowing demand in China, which was offset by strong sales in North America. In Q2, robust truck sales numbers from North America helped this division to increase adjusted earnings by 40% to $4.43 billion. The unit also ended Q2 with a profit margin of 10.9%, up from 8.6% in the year-ago period.
Notably, General Motors announced plans to indefinitely pause the production of its autonomous vehicle, Cruise Origin, which triggered a special charge of $600 million in Q2. Instead, the robotaxis will be spun off into a partnership with Uber (UBER) for autonomous ride-hailing in certain test markets.
Is GM Stock Undervalued?
Out of the 22 analysts covering GM stock, the consensus is a “moderate buy.” Eleven recommend a “strong buy,” one backs a “moderate buy,” eight maintain a “hold,” and two suggest a “strong sell.”
The average target price for GM stock is $55.98, indicating an upside potential of 17.3% from current levels.
Analysts tracking GM stock expect adjusted earnings to rise to $9.99 per share in 2024. So, priced at 4.81 times forward earnings, GM stock is really cheap - making it a reasonable pick for value investors, though broader headwinds surrounding the automaker's EV strategy may constrain near-term growth.
On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
