I am neutral on General Motors Company (GM) as Wall Street analysts are overwhelmingly bullish on it and the average price target indicates strong upside potential over the next year, but the valuation multiples look expensive relative to historical averages and the company faces stiff competition.
General Motors Company is an international automotive company headquartered in Detroit. The company manufactures, designs, and sells several vehicles, some of which are commercial vehicles, cars, crossovers, and trucks.
The company also sells parts of its automobile and is the second-largest automobile company globally. GM has a strong brand portfolio, too.
It has 10 distinct brands that cater to varying customer segments and niches. Those brands are Jiefang, Chevrolet, Wuling, Buck, Baojun, GMC, Holden, Cadillac, and Open. The company’s primary markets are the U.S. and China.
Strengths
Being one of the largest automobile manufacturers is one of the most prominent strengths of the company. By 2019, it had a market share of 16.9% (biggest in the industry), and it’s also renowned for being one of the most innovative companies in the world.
Be it a combustion engine or an electric car; GM has attributed most of its innovations to its significant investments in research and development over the years. Moreover, GM is also one of the few car-makers in the world to receive a five-star safety rating.
Recent Earnings
For Q3 2021, General Motors reported adjusted earnings of $1.52 per share, while revenue for the quarter was $26.78 billion.
For the fourth quarter, if GM delivers towards the high end of the forecast, this would imply that its earnings for the fourth quarter before taxes will be somewhere around $2 billion. It also stated that adjusted cash flow could be somewhere around $1 billion and $2 billion. This decline is mainly because the company has to build vehicles built in the past without chips.
Valuation Metrics
GM stock looks overpriced here as it trades above its historical averages on an EV/EBITDA ratio and price to normalized earnings per share basis.
Its EV/EBITDA ratio is 6.8 times compared to its historical average of 5.21 times, and its price to normalized earnings per share ratio is 8.2 times compared to its historical average of 7.63 times.
Analysts expect revenue to increase by 19.7% in 2022 and normalized earnings-per-share to increase by 2% in 2022.
Wall Street’s Take
According to Wall Street analysts, GM earns a Strong Buy analyst consensus based on 11 Buy ratings, three Hold Ratings, and zero Sell ratings in the past three months. Additionally, the average GM price target of $75.23 puts the upside potential at 41.8%.
Summary and Conclusions
GM stock is backed by a leading global automotive technology and manufacturing business that possesses significant intellectual property rights, as well as substantial manufacturing expertise and capability. Moreover, Wall Street analysts are overwhelmingly bullish on the stock as the average price target implies strong upside potential over the next year.
That said, the company faces numerous competitive threats from the likes of Tesla, Ford, and an increasing number of foreign competitors.
Furthermore, the stock trades at a premium to its historical valuation multiples.
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