GM Shifts Into Electric and Autonomous Vehicles

10/27/2020 5:00 am EST

Focus: INDUSTRIALS

Bruce Kaser

Chief Analyst, Cabot Undervalued Stocks Advisor

General Motors (GM) under CEO Mary Barra (since 2014) has transformed from a lumbering giant to a well-run and (almost) respected auto maker, asserts Bruce Kaser, editor of Cabot Undervalued Stocks Advisor.

The company has smartly exited many chronically unprofitable geographies (notably Europe) and trimmed its passenger car roster while boosting its North American market share with increasingly competitive vehicles, particularly light trucks.

We consider its electric and autonomous vehicle efforts to be near industry-leading. Its GM Credit operations are well-capitalized but will be tested as the pandemic unfolds.

Near-term, the shares will trade based on progress with a federal stimulus plan, the general U.S. economic outlook, trends in light vehicle sales, its progress with alternative vehicles and of course its earnings, which will be reported pre-market on November 5th.

No definitive news has emerged yet on the outcome of negotiations with Nikola (NKLA), but we expect some agreement by the December 3 deadline. Even that date is subject to change if needed. We think that GM will likely retain the partnership but take a higher equity stake either directly or through some type of warrants.

The company just recently announced a $2 billion investment to convert its Spring Hill, Tennessee facility into an electric vehicle production facility. Located just outside of Nashville, the plant will initially produce the all-electric Cadillac Lyriq SUV, which should reach showrooms in 2022.

GM’s Cruise unit (majority-owned by GM and includes Honda as an investor) received the first permit to allow driverless autonomous vehicle tests on regular San Francisco streets.

The stock has about 29% upside to our $45 price target. The target price implies 8.2x multiple on 2022 estimated earnings of $5.50. GM shares trade at 12.7x estimated 2020 earnings of $2.75 and 7.5x estimated 2021 earnings of $4.65. GM remains an attractive cyclical stock. I rate the stock a "Strong Buy".

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