General Motors (GM) reported a solid quarter on Wednesday, affirming guidance for cash flow and earnings of $6.50 to $7.50 per share. Analysts mostly viewed the quarter bullishly, with Bank of America (BAC) reiterating a $95 target and Citigroup (C) raising its target to $98. These targets seem unattainable in the near future, yet they reflect GM's compelling valuation. Although business and the outlook are strong, the stock is down around 30% for the year. This presents an excellent buying opportunity with shares trading under $40, while the market is preoccupied with everything that could go wrong.
GM was my top pick for 2022; thus far the stock has faired rather poorly. I expected a challenging year for growth and speculative tech stocks due to overvaluation and a reprising of risk. Still, I was generally bullish on value, low-multiple stocks like GM, which had an 8 price-to-earnings. While the entire market has seen multiple compression, I didn't expect a stock with an 8 p/e to compress to 5. Economic concerns and rising interest rates have the market fretting over economically sensitive companies like GM. Fair enough, but those concerns are well embedded in the current valuation.
GM recently raised its stake in Cruise to about 80%. The autonomous drive company can be a significant disruptive force in the ride-share business and help GM to monetize opportunities when enabled in its vehicles. Currently, Cruise is seeking permission in San Francisco to charge for autonomous rides for their fleet of Chevy Bolts. Cruise is well ahead of rivals in its capability to offer autonomous rides within a geofenced area, encompassing 70% of San Francisco on the way to the whole city. Expect a methodical roll-out to additional cities using a purpose-built autonomous EV, called "Origin," with no steering wheel and with sliding doors, that will debut in 2023. I'm hard-pressed to find any value attributed to Cruise in GM's $55 billion market cap. This is a stock market driven by fear, skepticism, and capital preservation. Investors want current cash flow, not stories about flying cars, or self-driving ones. Therein presents an opportunity.
GM is on the front end of a steady roll-out of EV models. The Chevy Bolt is back in production, with 50,000 units planned for this year, after a six-month pause to resolve a battery production glitch. Reviews for the newly released Hummer have been stellar, the first EV built with GM's Ultium vehicle platform, using a flexible battery technology that can be employed across multiple vehicle designs. GM's diverse EV line-up will bring many new customers to the company, adding to growth. I know, the EV market bubble has burst and, again, the market only wants to know about the current cash flow, still the EV ramp-up is on its way.
The inadequate chip supply has slowed production and caused lean inventory, bolstering vehicle prices. The market is skeptical that GM can continue to pass along high prices to consumers. There's a fair amount of uncertainty regarding chip supplies, auto pricing, and economic conditions. For now, GM is executing well through a laundry list of concerns. With the stock trading at less than 0.5-times sales, GM has had room for efficiencies in its operation to continue to support margins while investing in growth initiatives.
GM's CEO, Mary Barra, has led GM to consistent and solid performance, hitting targets and timeframes for years. She projects a domestic run-rate of a million EVs by the end of 2025 and a doubling of revenues by 2030, much of it from higher margin software and autonomous.
The term "peak auto" has been on Wall Street's lips for a decade. The good news about worries over the next recession, interest rates, gas prices, commodity costs, and "peak auto" is that they've kept shares of GM at a remarkably cheap price to invest. But the same discounting of ongoing concerns often leads to a frustrating investment. At some point, the substantial progress GM is making in EVs and autonomous driving will be reflected in higher earnings and a stock price closer to the bullish analysts' targets. Mea culpa for the "top idea" that's lagged so far in a tough market, but I'm still riding with GM.