Despite the automobile industry witnessing several headwinds since last year, this auto stock could be your top choice if you want to capitalize on the industry’s long-term prospects. I am talking about General Motors Company (GM).
Supply chain disruptions, high inflation, and rising interest rates led to a decline in the sales of light vehicles last year to their lowest level since 2012. Also, an estimated 13.70 million to 13.90 million new vehicles were sold last year, representing a year-over-year decline of 8% to 9%. However, General Motors Company (GM) stood out as it registered a 2.5% year-over-year rise in vehicle sales last year.
The company not only reclaimed the top spot as America’s leading automaker from Toyota Motor Corporation (TM) last year, but it also registered a solid 41.4% year-over-year increase in new vehicle sales in the United States in the fourth quarter. With stricter emission norms, government subsidies, growing popularity, and the useability of electric vehicles, GM is poised to benefit from the fast adoption of electric vehicles.
GM’s strong portfolio of ICE and electric vehicles helped the company beat the consensus earnings and revenue estimates in the fourth quarter of fiscal 2022. Its EPS came 25.9% above the estimate, while its revenue beat the consensus estimate by 6.1%.
For fiscal 2023, GM expects its net income attributable to stockholders to be between $8.70 billion to $10.10 billion. It expects adjusted EBIT between $10.50 billion to $12.50 billion, and its adjusted EPS is expected to come between $6 to $7.
In addition, it expects net automotive cash provided by operating activities to come between $16 billion and $20 billion and adjusted automotive free cash flow to come between $5 billion and $7 billion.
GM’s CFO Paul Jacobson said that demand and pricing for GM’s vehicles “remain strong.” He said, “We think the underlying business is going to be pretty consistent with what we saw last year, and I think that’s a slightly more bullish statement than where most of the market is.”
GM has plans to build one million EVs in North America by 2025 and to stop selling gasoline-powered vehicles by 2035. GM’s EV plans got a boost after the U.S. Energy Department finalized a $2.50 billion low-cost loan to a joint venture of GM and LG Energy Solution to pay for three lithium-ion battery cell manufacturing facilities.
GM has set some bold long-term targets where total revenue is expected to grow at a 12% CAGR through 2025, reaching more than $225 billion. Revenue from EVs is expected to be more than $50 billion in 2025. The company’s revenue is expected to double, reaching between $275 billion and $315 billion by 2030.
The stock has gained 8.2% in price over the past month and 16.5% year-to-date to close the last trading session at $39.18.
Here’s what could influence GM’s performance in the upcoming months:
Favorable Recent Developments
On February 9, 2023, GM and GlobalFoundries Inc. (GFS) announced a strategic, long-term agreement to establish a dedicated capacity corridor exclusively for GM’s chip supply. This agreement will help GM reduce the number of unique chips required to power its complex, tech-heavy vehicles.
On January 31, 2023, GM and Lithium Americas Corp. (LAC) announced that they would jointly invest in developing the Thacker Pass mine in Nevada, with GM investing $650 million in LAC. It is the most significant investment by an automaker to produce battery raw materials, and lithium carbonate from Thacker Pass will be used in GM’s Ultium battery cells.
Robust Financials
GM’s revenue increased 28.4% year-over-year to $43.11 for the fourth quarter ended December 31, 2022. Its net income attributable to stockholders increased 14.8% year-over-year to $2 billion. In addition, its adjusted EPS came in at $2.12, representing an increase of 57% from the year-ago period.
GM’s revenue increased 23.4% year-over-year to $156.74 billion for the fiscal year ended December 31, 2022. Its adjusted EBIT increased 1.3% from the prior-year period to $14.47 billion. The company’s adjusted EPS came in at $7.59, representing an increase of 7.4% year-over-year.
Solid Historical Growth
GM’s net income grew at a CAGR of 13.9% over the past three years. Its EBIT grew at a CAGR of 23% over the past three years. In addition, its EPS grew at a CAGR of 10.3% in the same time frame.
Mixed Analyst Estimates
Analysts expect EPS for fiscal 2023 is expected to decline 18.6% year-over-year to $6.18. On the other hand, its EPS for fiscal 2024 is expected to increase 0.8% year-over-year to $6.23. Its revenue for fiscal 2023 and 2024 is expected to increase 3% and 2% year-over-year to $161.44 billion and $164.64 billion, respectively.
Discounted Valuation
In terms of forward non-GAAP P/E, GM’s 6.34x is 56% lower than the 14.42x industry average. Its forward EV/EBIT of 13.30x is 1% lower than the 13.38x industry average. Also, the stock's 6.91x forward EV/EBITDA is 29.1% lower than the 9.73x industry average.
Mixed Profitability
In terms of the trailing-12-month net income margin, GM’s 6.34% is 32.5% higher than the 4.78% industry average. Likewise, its 11.37% trailing-12-month EBITDA margin is 0.9% higher than the industry average of 11.28%. Furthermore, the stock’s 13.52% trailing-12-month Capex/Sales is 336.2% higher than the industry average of 3.10%.
On the other hand, GM’s trailing-12-month gross profit margin of 13.50% is 61.8% lower than the 35.30% industry average. Likewise, the stock’s 0.62x trailing-12-month asset turnover ratio is 39.5% lower than the industry average of 1.02x.
POWR Ratings Show Promise
GM has an overall rating of B, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. GM has a B grade for Growth, consistent with its solid historic and expected growth.
It has a B grade for Value, in sync with its discounted valuation.
GM is ranked #19 out of 61 stocks in the Auto & Vehicle Manufacturers industry. Click here to access GM’s Momentum, Stability, Sentiment, and Quality ratings.
Bottom Line
GM’s stock is trading above its 50-day and 200-day moving averages of $37.79 and $36.97, respectively, indicating an uptrend. With the faster adoption of electric and hybrid vehicles, stricter emission norms, and government subsidies, GM remains well placed to capitalize on the electric vehicle revolution as it has a series of new EV launches lined up this year.
The company is also investing heavily and entering into strategic agreements to secure crucial raw materials for EV manufacturing. This should help drive its long-term growth. Given its robust financials, solid growth attributes, and discounted valuation, it could be wise to buy the auto stock.
How Does General Motors Company (GM) Stack up Against Its Peers?
GM has an overall POWR Rating of B, equating to a Buy rating. Check out these other stocks within the Auto & Vehicle Manufacturers industry with an A (Strong Buy) or B (Buy) rating: Isuzu Motors Limited (ISUZY), Honda Motor Co., Ltd. (HMC), and Wabash National Corporation (WNC).
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GM shares were unchanged in premarket trading Monday. Year-to-date, GM has gained 17.60%, versus a 4.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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