General Motors – Automotive Phoenix

Summary

• The company has resolved long-standing worries about its market share loss by defending the current ~16% share and staying the biggest automotive player in North America.
• Its recent gains in EV market share (now ~10%) give hopes for market gains in the upcoming years. We think that GM’s electric trucks are still the niche with above-average guardrails in the EV space. Although EVs are a low-margin product, this positioning should result in more pricing power and higher margins in the product line.
• GM proved that despite expanding to the low-margin EV space, it could keep its profitability by implementing major cost-cutting programs like this year’s $2bn fixed cost reduction.
• GM has substantially improved governance and capital allocation visible in recent buybacks (19% of float), and growing dividends (33% increase this year) could offer a chance for possible rerating.
• Internal Combustion Engine (ICE) cars could stay with us for longer as the incoming administration wants to cancel or limit EV incentives and allow ICEs to be freely offered for longer.
• Under Trump’s administration, GM, as a US manufacturer, could be partially protected from the Chinese competition, and the company largely depended on local suppliers is not exposed to the risk of a potential trade war.
• General Motors is the most undervalued automotive company in North America, with the strongest fundamentals in many years and a value trap stigma that is slowly changing. This long-maintained staple is visible in trading multiples. Despite ~58% YTD share price gain, GM trades at ~5.9x Forward PE and ~6.5x Forward EBITDA compared to the industry’s ~6.6x Forward PE and ~10.1x Forward EBITDA.
• Our SOTP valuation indicates a ~124% upside from the current share price. We think that this valuation offers a substantial moat and protects from worse-than-expected performance.

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The story of decline

General Motors is the biggest car manufacturer in the United States and 5th globally. Together with Ford, it’s the legend of the US automotive landscape. GM is the owner of iconic names like GMC, Chevrolet, Cadilac, and Buick. Together with its subsidiaries, it offers a wide range of sedans, SUVs, and legendary trucks. But Vega, I hear you saying, if it’s such a big and popular company, shouldn’t it be reasonably valued and offering little to no upside? No… the market isn’t efficient, and it is especially visible in this case.

GM’s Stock Price, TTM Net Sales, and PE Ratio over the last 5 years

I started researching GM around this time last year. It stood out as a stock trading at ~5x PE with ~$55bn in cash and at ~$45bn market cap, all of that with ~16% US market share. Why was it trading so low then? For many years, GM was considered cheap. Since 2015, with a few exemptions, it has been trading at a PE range of 3 to 6. For many years (even before 2015), it was considered a value trap. These are the main reasons why:

• GM was operating in a highly commoditized market with narrow margins and without any sustainable success in increasing them
• the company was losing market share to its competitors, especially Toyota, Honda, Hyundai, and Tesla. According to various agencies, two decades ago, GM had ~28% of the market which declined to 17.7% in 2015
• Highly bureaucratic culture with 37 layers of management in 2015
• GM faced increased regulatory challenges resulting in $4.5bn in recall costs in 2014
• Management struggled with capital allocation and operations optimization
• EVs were gaining traction, and the future of Internal Combustion Engine cars was looking bleak as eco-friendly states and federal governments started planning the transition to emission-free cars

Winds of change

In 2014, GM appointed a new CEO – Mary Barra, and she slowly started destroying GM’s sluggishness. With such a big and inefficient organization and Mary never working in this position, It took a long to see changes, but eventually, they came:

• GM started defending its share better, slowing down the loss and gaining ~2pp by 2018. Since then its market share fluctuated at ~16%. In 2023, its share went up from 16.3% to 16.5%, and this year stabilized at 16.4%.
• GM invested $0.5bn in Lyft and bought Cruise in 2016 for $1bn, resulting in a 30% increase in autonomous driving patents filed.
• The company achieved a 12% reduction in operating expenses by cutting $5.5bn costs in 3 years
• GM beat Wall Street earnings forecasts in 34 of the last 35 quarters, per FactSet

The recent year brought more good news for GM:

• In November 2023, the company announced a long-awaited buyback of $10bn that was enlarged by an additional $6bn in early 2024. As a result, diluted share count dropped by 19% YoY.
• It also announced a 33% dividend increase starting in 2024, now offering ~1% dividend yield.
• The company rolled out multiple EV models at the end of 2023 and continued into 2024, gathering surprisingly good reviews. As a result, GM grew its EV market share from 6.5% in 1Q24 to 9.8% by 3Q24. It’s a good sign that GM eventually can become a significant player in the EV space.
• GM is on track to achieve $2bn in fixed cost reduction this year and growing its Net Income margins YOY despite selling more low-margin EVs (the company expects to significantly reduce battery pack cost in the next two years, improving the product line’s profitability).

We think that share buybacks and dividend raises, combined with selective investments in EVs and autonomous driving, show improvement in capital allocation. These steps, combined with cost reduction plans at GM, should translate to growing shareholder returns. Another positive sign is EV lineup strength, resulting in market share gain. We see it as a sign of growing competitiveness that gives us hopes for keeping and slightly expanding its place among automotive companies in the US. Another plus for GM could be Donald J. Trump’s reelection. The president-elect is favorable to ICEs and wants to limit EV incentives. Moreover, he is keen on protecting US manufacturing, reducing worries about Chinese competition. Despite limited pricing power and union issues, these factors make us bullish on the stock.

Valuation

We analyzed GM through the scope of multiple valuation methods. Overall, our preferred approach is a Sum of The Parts valuation as it gives us a detailed view of the individual segments.

SOTP

GM could be divided into three main segments: 1) Automotive (car manufacturing), 2) GM Financial (leasing and car loans), and 3) Cruise (autonomous driving startup). Usually, we like to run a Discounted Cash Flow (DCF) valuation of individual segments, but due to the specificity of some of them, we limit the DCF method to the Automotive Segment. For GM Financial, we use a Book Value method as it is an effective tool for analyzing financials and is relatively simple. We value Cruise using this year’s share valuation that was disclosed to the public.

GM Revenue Breakdown (2022-LTM, $bn)

GM EBIT Breakdown (2022-LTM, $bn)

Automotive

We used conservative assumptions in automotive segment cash flow projections with a lower range of this year’s guidance and limited growth and margin expansion in the upcoming years:

• We expect this year’s revenue to grow by 8% YoY and then gradually decline to 3% growth by 2029 and continue at this level.
• We assume a limited margin improvement with EBITDA Margin growing from 2024E’s 10.9% to 11.8% by 2033E.
• We forecast capex by assuming the same share of Revenue as last year at 6.8% in the forecast period.
• In terms of Net Working Capital (NWC), our 2024E forecasted days receivables, days payables, and days inventory in the projection period.

Automotive Segment Financials ($mm)

In our Automotive Valuation, we used a Weighted Average Cost of Capital (WACC) of ~8.2%. It was calculated by allocating 70% of equity value to the segment and all of the Automotive debt. We note the whole company (WholeCo) WACC would be lower at ~6.8% as it would include an additional ~$105bn of GM Financial debt at a lower cost than the equity.

Based on that WACC, we estimate the PV of Free Cash Flows to the Firm at ~$20.2bn. For Terminal Value (TV) we use the Exit multiple Method with the EV/EBITDA of 8.0x. As a result, we estimate the PV of TV at ~$102.1bn That brings the Automotive segment valuation to ~$114.6bn compared to GM’s market cap of just $62.7mm.

GM Financial

The loans and leasing segment is tied to the automotive side as it provides financing to GM’s customers. This segment is behaving largely as a bank or a leasing company, and our preferred approach is to look at its book value. This should yield a more realistic valuation compared to the classic DCF, as financial institutions tend to trade at a discount due to financial risk, including interest rate fluctuations and customer default risk.

Last quarter, GM Financial had ~$136bn in total assets and ~$120bn in liabilities, resulting in a book value of ~$16bn (~26% of the current market cap).

Cruise

Cruise is an interesting business that could potentially be a gateway to a true robotaxi service. However, there is more development needed. With recent National Highway Traffic Safety Administration (NHTSA) probes into Cruise and the company admitting a false report to the agency, we believe it is too early to forecast any autonomous taxi cash flows. Safety compliance was a major disruption to Cruise’s operations as the company had to recall 1,200 vehicles to close the investigation in August. Having said that, GM is on the way to set matters straight and Cruise is back on the road. Going forward, the mother company limited Cruise’s yearly cash burn to ~$1.7bn and wants to expand to new cities as cheaply as possible.

We base our Cruise valuation on the internal valuations of its shares. Based on February reports its value was slashed by ~60% since 2022, from $29.0 to $11.8. Given ~1bn shares outstanding, the company could be currently valued at ~$12.2bn valuation. The Detroit manufacturer is the biggest shareholder with a ~80% stake that should be worth ~$9.8bn.

SOTP Valuation Results

With car manufacturing worth ~$114.6bn, GM Financial at $16.0bn book value, and Cruise stake at the valuation of $9.8bn, the General Motors fair value is ~$140.4bn. Based on the market cap of $62.7bn, there’s ~124% upside potential.

Current price

Despite ~58% YTD share price gain, GM trades at ~5.9x Forward PE and ~6.5x Forward EBITDA compared to the industry’s ~6.6x Forward PE and ~10.1x Forward EBITDA. Our SOTP valuation indicates a ~124% upside from the current share price. We think that this valuation offers a substantial moat and protects from worse-than-expected performance.

GM stock performance

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