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General Motors Company (NYSE: GM) is an undervalued automotive stock with high long-term upside. This recommendation is based on its strong positioning in emerging markets, investment in autonomous driving capabilities, and new management focusing on profits. The stock has a price target of $44.28, representing a 21.02% upside.
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General Motors Company NYSE: GM Recommendation: BUY Patrick Meyer and Anthony Graffia
Investment Thesis Recommendation: General Motors Company (NYSE: GM) is an undervalued automotive stock with high long term upside, due to this we recommend a buy – Ideally we would have gotten in prior to the announcement of Q3 earnings, although we still feel that there is large amounts of opportunity at the current price point of the stock. Rationale: General Motors strong, traditional US Business, in addition to strong positioning within emerging markets places the company in a position to capitalize upon current streams of revenue, while also exploiting industries within China and the developing autonomous marketplace. 1 High Investment and development within Autonomous driving capabilities with clear long term strategy 2 Solid placement within the Chinese marketplace and positioning for more growth 3 New management prioritizing profits and elimination of unnecessary costs Price Target: $44.28 21.02% upside from current price of $36.59
Company Overview Company Profile Historical Stock Chart • General Motors Company designs, builds, and sells cars, trucks, crossovers, and vehicle parts, while also providing automotive financing services across the globe • GM has 8 brands globally and 4 in the U.S. (Buick, Cadillac, GMC and Chevrolet) • It operates under three segments: GM North America, GM International, and GM Financial • General Motors Co. emerged from the bankruptcy of General Motors Corp. (old GM) in July 2009 • GM’s acquisition of Cruise in 2016 for $581 million has catapulted their autonomous-driving technology • GM sold its money-losing European automotive and financial divisions in March 2017 for a combined $2.3 billion Revenue Breakdown ($mm) 2017 Sales by Geography (thousands)
Industry Overview U.S. Market Share Industry Characteristics US Sales for First 6 Months of 2018* Ford F-Series: 451,138. +4.9% Chevy Silverado: 219,074. +10.7% Ram Pickup: 233,539. -6.7% Nissan Rogue: 215,202. +10.0% Toyota Rav4: 198,390. +7.4% Honda CR-V: 179,580, -4.1% Toyota Camry: 178,795. +1.1% Honda Civic: 176,242. +0.3% Chevy Equinox: 156,365. +17.2% Toyota Corolla: 149,805. -9.5% • The Automotive market as a whole is highly cyclical, with sales generally tracking the performance of the economy • High sales growth in emerging markets (such as Asia) can be difficult to tap into due to barriers to entry for many companies • High investment into R&D in the realms of both electric and autonomous vehicles can be seen in large amounts • Overall, The industry domestically is mature yet open to innovation in a variety of different ways • Companies are beginning to diversify into other industries besides simply auto sales as a whole Key Trends Company Profile • Increase in sales and development of both electric and hybrid vehicles throughout the globe • Increase in investment into autonomous driving capabilities from traditional and nontraditional automakers • Increase in sales of used cars • Decrease in reliance on personal cars for transportation within cities due to the emergence of ride sharing services • Emergence of new business models for car companies, such as the development of subscription services for vehicles • Continued price pressure due to highly fragmented market • Emergence of domestic-based competitors in emerging economies *Percentage change numbers are in comparison to the same period last year
1 Well-positioned for Future of Autonomous Driving The Race for Autonomous Capabilities Overview Autonomous vehicles registered to be tested on public roads in California • Recent Investments in Cruise • Japan’s Softbank Vision Fund invested $900 Million, and another $1.35 Billion when commercially viable (20% equity position) • Honda is set to invest $2.8 Billion over the next 12 years (5.7% stake) • GM additional funding of $1.1 Billion • All of these investments and stakes allow for not only better research within Cruise, but also helps to share expertise between companies (such as Honda’s engineering) • A little over two years ago, GM acquired the company Cruise Automation for a little over $1 Billion in combination of cash and stock • With the most recent investment from Honda, Cruise is now valued at 14.6 Billion if it were simply a standalone company. • Although before the acquisition Cruise was known for aftermarket modifications, GM’s interest is more focused on the production of cars with autonomous capabilities off the factory lines • GMs automotive efforts are industry leading, often seen as neck and neck with the efforts of Alphabet’s Waymo • Overall, the development of this technology has the potential to open up a variety of different revenue streams for Cruise and GM as a whole Recent Progress Long Term Strategy • Unlike many of its competitors, GM currently has a factory north of Detroit which has production capabilities for self-driving Chevy Bolts • Currently the autonomous version of the car costs $200,000 to build, although the company is currently working on lowering costs • At the moment, GM refrains from testing cars above a speed of 25 miles per hour • In the past year, GM has acquired Strobe, a startup focused on autonomous driving. They have developed a Lidar technology to allow for better vision for the vehicle. • This Lidar technology will be smaller, cheaper, and can see further ahead than existing equipment, helping to lower the cost of vehicle and also allow for faster driving speeds while retaining safety. • The recent partnership with Honda will help to give GM expertise in unique areas, such as the efficient use of interior vehicle space, boosting the ideal user experience. • Long term, GM sees several different possible revenue streams for the technology of autonomous driving • The traditional stream: Selling autonomous vehicles to the public for usage, presumably in the realm of both passenger vehicles and the realm of commercial vehicles (i.e. semi trucks) • Partial innovation view: GM has also discussed the possibility of partnering with a ride sharing service (such as Lyft which they own roughly 9% of) to deploy a fleet of self-driving vehicles for usage • Complete Innovation: The subsidiary Maven, which is primarily a car sharing service with peer-to-peer capabilities, could be utilized for the output of a self driving ride sharing service • These services could launch as soon as 2019 (the stated intended release) for testing
2 Strong Positioning in China Sales of Passenger vehicles in China from 2008 to 2017 (In Million Units) Overview Baojun Unit Sales (thousands) • Out of all the major American car manufactures, GM has one of the best holds over the high growth Chinese market • A strategic partnership with SAIC motor allows for GM to cater to the Chinese masses with the Baojun brand which they are 44% owners of • Baojun cars start as low as $6000, providing a way for individuals in the Chinese middle class within smaller cities to purchase a car (with subsidies, cars can cost as little as $5,200) • A new and efficient within plant within mainland China ensures profitability • Strong growth and presence of more luxurious brands in recent quarters (such as Cadillac in Q3) help to spur earnings to new levels even if the company misses on overall sales growth • Large amounts of car production within the Chinese borders provides for some insulation from trade wars CAGR: 83.9%
New Management Focused on Efficiency 3 Focus on Core Competency Management Team Mary Barra, CEO • Appointed CEO January 15, 2014 • Previously served as Executive Vice President of Global Product Development Dan Amman, President • Appointed president in January 2014 • Previously served as Executive Vice President DhivyaSuryadevara, CFO • Appointed CFO in September 2018 • Previously served as Vice President of Corporate Finance • Barra's focus at GM has been to maximize return on invested capital by slashing unnecessary costs and doubling down in strong segments • Focus has shifted to North America and China, which account for 80% of retail vehicle sales • GM’s last Australian plant closed in October 2017 because of a lack of government support, high production costs, and the fact that is the most fragmented auto market in the world • GM exited Russia in 2015, India in 2017, and South Africa in 2017 due to rising costs and decreasing returns • In July 2017, GM sold its GM Europe segment, which lost $20 billion over the last 19 years, to PSA Group for $2.3 billion • In early 2018, the company restructured its operations in Korea in to increase efficiency • GM has left the door open on potentially returning to some of these markets in the future EBITDA Margin Cost-cutting Measures • Through plant closings and benefit concessions new GM’s break-even point in U.S. sales has been reduced by roughly 40% • GM has cut material costs by reducing vehicle weight by hundreds of pounds in certain models • Longer-tern contracts have been signed with suppliers to allow for cheaper parts • In 2010, GM’s factories were only operating at 39% global capacity, currently they operate at approximately 78% capacity • Management’s goal is to have 99% global capacity by 2020 • By 2025, GM plans to reduce its number of vehicle platforms from 26 to 4 • Yesterday the company offered to buy out 18,000 employees as part of its plan to reduce its labor expenditures • Potential for more plants to be shut down both domestically and abroad
Final Recommendation Downside Case Price Target: $32.30 Upside: (11.72%) Base Case Price Target: $44.28 Upside: 21.02% Upside Case Price Target: $56.90 Upside: 53.84% Recommendation: General Motors Company (NYSE: GM) is an undervalued stock within the market which is well-positioned for the autonomous vehicle revolution, a strong foothold in a growing China, and has a new management team dedicated to improving margins. Therefore, we recommend a buy.
