Can General Motors (GM) speed past high expectations, a potential recession, high interest rates and increased joblessness to come out ahead for investors in 2023?
So far, all signs point to, Yes. But don't expect Wall Street to tell you that.
General Motors just posted strong earnings last week, capping off its best year on record. But it's also true that the car industry largely deviated from what was considered normal in 2022, thanks to chip shortages, strong auto pricing, minimal incentives, and elevated used car prices. Still, GM forecasts another solid year of earnings for 2023 and now the idea of buying around $40 per share appears compelling for long-term investors.
Owning an automaker is often considered unwise, however, when the potential for a Fed-induced recession is on the horizon -- a setup we are now likely facing. High interest rates and rising unemployment could mean more people will delay or turn away from buying new cars. But an impending economic downturn may hurt autos less than in prior cycles as there's been an underproduction, because of component shortages over the last two years. Nonetheless, GM is preparing for economic weakness by eliminating $2 billion in costs.
GM trades at a depressed valuation of 5-times to 6-times earnings and a market cap at 30% of its $156 billion revenue, a valuation the market justifies by perpetually assuming peak earnings in an economically sensitive competitive industry. GM's aggressive investing in EVs and autonomous driving has left minimal spare capital to take advantage of its underpriced stock. That changed in the third quarter when they resumed stock buybacks. In the past two quarters, GM bought back 60 million shares, over 4% of shares outstanding, as part of a $5 billion buyback. Shareholders would be best served with continued buybacks at its current valuation instead of a higher dividend.
While Wall Street gripes about peak earnings, what analysts are missing is that GM has been significantly under-earning due to heavy investments in its transition to electric vehicles, under-used EV plants, and development of autonomous driving by funding of Cruise, the San Francisco-based self-driving technology company. In the past year, Cruise, 80% owned by GM, lost $2 billion.
GM in this case could be likened to the proverbial tortoise. It just keeps plodding along and, if you're not paying attention, you would hardly see the progress, yet, against all odds, the tortoise is poised to win. Cruise is showing steady progress in its efforts to roll out an autonomous taxi-like service, currently operating in San Francisco, Phoenix, and Austin. A purpose-built autonomous vehicle, Origin, will debut this year.
Cruise logged in 2022 over a million driverless miles with paying passengers. Morgan Stanley's auto analyst, Adam Jonas, wrote down the value of Cruise to zero when he yanked his GM price target to $30 -- a stark example of Wall Street's sentiment toward GM. Indeed, there's no guarantee of Cruise's success, and it will take time, capital, and commitment from GM to fulfill its potential. Yet, this tortoise is gaining ground in an industry with a total addressable market in the hundreds of billions.
GM's rollout of EVs has been frustratingly slow. The development of their Ultium battery chemistry in an interchangeable car platform took years, yet allows them to efficiently produce an array of automobiles. With the EVs GM plans to introduce over the next two years, the automaker will have the widest breadth in the industry. Initial unveils of the Hummer, Cadillac Lyric, Silverado, and Chevy Blazer have impressive specs with high marks from auto reviewers. EV incentives for manufacturers and consumers through the Inflation Reduction Act (IRA) will greatly benefit GM.
The investments GM has been making in Cruise and EVs take capital that has been drawn from strong company-wide execution. In contrast, Ford's (F) earnings missed the mark last week, and the CEO, Jim Farley, blamed company-specific execution flaws, including being the top automaker for recalls along with missteps in Europe, a market GM withdrew from.
GM's CEO, Mary Barra, believes the company can double revenue by 2030, with a focus on autonomous and self-driving software, battery technology, and consumer and commercial EVs. Meanwhile, analysts are asleep in a "what's past is prologue" mentality regarding GM along with endless fretting about the economy, while missing Barra's execution and ignoring the company's potential, as it retires swaths of stock through buybacks at a 5-times to 6-times operational cash flow. If shareholders are lucky, this tortoise will sneak up and speed by -- reminiscent of when Microsoft's (MSFT) stock was left for dead for a decade and Apple's (AAPL) massive buybacks at 10-times to 11-times earnings when Wall Street only saw it as a hardware company. Now, I believe, this indifference to GM's execution and progress cloud that the shares sit at a tremendous value for long-term buyers.
(Ford, Microsoft and Apple are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells them? Learn more now.)