While we must always be braced for downside volatility, we like the long-term prospects of our portfolios of undervalued stocks. We think valuations for equities are attractive, including these automakers, observes Jason Clark, a value investing specialist and contributing editor to The Prudent Speculator.
In its latest Investor Relations event, General Motors (GM) provided details on how it plans to double its annual revenue and expand margins 12% to 14% by 2030.
The company said it believes it can deliver a compound annual growth rate of 4% to 6% on auto sales and financing revenue, and approximately 50% in software and new businesses revenue. Management noted that 20% of its North American manufacturing footprint will be EV capable by 2025 and more than 50% by 2030, while its vehicle launch process has also been accelerated from ICE to EV.
GM discussed a number of new projects in which it is currently incubating and investing, which have addressable markets ranging from $3 billion to $500 billion.
Key new businesses already in commercialization (and relevant target for each) include OnStar (OnStar Insurance = $6 billion+ revenue opportunity by 2030), BrightDrop (targeting $10 billion+ in revenue at low 20% margin in 2030) and GM Defense ($25 billion total addressable market).
We continue to like GM and believe that the company’s move away from sedans and towards trucks and SUVs was important and supplies the huge amounts of cash flow required to launch more than 30 EVs in the very near term. The pivot to EVs has been impressively swift across the entire industry (after a slow start) and we think it’ll prove valuable for a multitude of reasons.
The valuation for GM remains very compelling, despite a share price that is up 40% this year, as consensus EPS estimates for 2021 and 2022 presently reside at $6.01 and $6.76, meaning that the stock is trading for a single-digit multiple of those figures. And, if the company can deliver anything close to its long-term growth targets we think our current $80 target price will be increased substantially in the years to come.
Meanwhile, the shares of Volkswagen AG (VWAGY) have slumped since we first recommended them in May at $36 or so, but we aren’t losing our faith. The German carmaker has been hampered by ongoing chip shortages (along with most other auto manufacturers), even though premium brand sales have been strong and cost controls have proven beneficial.
VWAGY expects to report Q3 results towards the end of this month and in its July update said that it expects revenue to come in “significantly higher” than last year’s 222.9 million euros.
Of course, there was a little bit of manufactured controversy when CEO Herbert Diess tweeted that bike riding is fun and good for the environment. We envision city-centers of the future to be emissions free (bicycle, car, bus, train) and expect VW to be a major part of that outcome.
We continue to like VWAGY’s differentiated brands that target volume (VW, Skoda, Seat), premium buyers (Audi, Lamborghini, Bentley), sports cars (Porsche) and trucks (MAN, Scania).
We continue to like VW’s electric car future, bankrolled in large part by enormous profits at Porsche and expect the chip shortages to be resolved (although we have no concrete timeline). With investors clamoring for often profitless stocks in the EV space, we continue to have a preference for value-priced Volkswagen. Our target price for VWAGY is $55.