I am neutral on General Motors Company (GM) because the heavy competition it faces, along with it its slightly elevated valuation multiples, offset Wall Street bullishness on the stock.
General Motors is an American multinational automotive manufacturer based in Michigan. The company was founded in 1908 as a holding company and restructured in 2009, following bankruptcy during the Great Financial Crisis. (See GM stock charts on TipRanks)
Strengths
General Motors manufactures its products across several countries. It has twelve brands under its name, with the four core brands being Chevrolet, Buick, GMC and Cadillac. The company also owns or holds stakes in other brands like Baojun, IMM, etc. It is also involved in a number of joint ventures.
General Motors has four main business segments: GM North America, GM International Operations, Cruise, and GM Financial. It also caters to the needs of the military under GM Defense.
At its peak, General Motors held a market share of 50% in the U.S., and from 1931 to 2007, the company was the world’s largest automaker.
Recent Results
In the third quarter of 2021, General Motors reported aglobal marketshare of 8.4%, which shows a decrease from the previous year’s 10.4% in the same quarter.
The total reported revenue for the quarter stood at $26.8B, with an EBIT value of $2.9 billion, showing a decrease from the previous year. These earnings come mostly from the GMNA and GM Financial segments, at $2.1 billion and $1.1 billion, respectively.
The company’s earnings per share have also decreased, largely due to the semiconductor shortage, and are currently reported at $1.52 per share. Meanwhile, free cash flows have decreased year over year due to production disruptions and work-in-process inventories.
Zooming in on the major contributing segments, GMNA reported net revenue of $20.6 billion, although the company’s market share dropped nearly 50% since the same quarter last year. GM Financial reported EBIT of $1.1 billion, with automotive liquidity and debt at $32.7 billion and $16.8 billion, respectively. GM Financial also provided the brand Cruise with a $5 billion line of credit to fund the purchase of automotive vehicles. General Motors also reported net revenue of $10.3 billion from GM China Auto JV, which is not consolidated in GM financial results.
Valuation Metrics
General Motors’ stock looks reasonably priced at the moment, as the EV/EBITDA ratio is 7.2x compared to its 5-year average of 6.7x. Furthermore, its Price to forward Normalized Earnings ratio is 9.7x comparted to its 5-year average of 7.8x, and its Price to Free Cash Flow ratio is 12.3x compared to its 5-year average of 15.5x.
Wall Street’s Take
From Wall Street analysts, General Motors earns a Strong Buy analyst consensus, based on 12 Buy ratings, 1 Hold rating, and 0 Sell ratings in the past 3 months. Additionally, the average General Motors price target of $73.38 puts the upside potential at 25.39%.
Summary and Conclusions
General Motors has a long and storied history as one of the world’s pre-eminent automotive manufacturing companies. That said, in recent years younger rivals like Tesla have surpassed it in market cap and in technological prowess, as the global automotive market has steered towards electric vehicles. General Motors has been slower than Tesla (TSLA) to adapt to changing conditions.
That said, the company remains reasonably priced based on historical metrics, analysts are highly bullish on the stock here, and the company is investing aggressively to catch up to Tesla and other competitors.
As a result, investors could likely do worse than to invest here, but historical valuation multiples imply that they might want to wait for a pullback before adding shares.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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