General Motors: Getting Ready to Take on Tesla

General Motors (NYSE: GM), the North American car manufacturer, is in the middle of three major initiatives that when fully executed will not only make it competitive with Tesla (NASDAQ: TSLA), they will make this car company more valuable than Tesla.

The first is the purchase of the self-driving car platform, Cruise. This software is being integrated into GM cars in three phases, the first of which has already begun. 

The second initiative is a $35-billion makeover of GM’s product line to only produce electric cars by 2035. The third is to create unique partnerships throughout its supply chain so that it will control the North American supply of raw, and intermediate, materials needed to produce electric cars. 

Supply Chain Commmand

Of all three initiatives, the most significant in out-competing Tesla is the control of the supply chain around EVs. Tesla just does not have the size to compete at the same level as GM in terms of strategic supply chain partnerships, and this should allow GM to become more competitive than Tesla or any of the other large car manufacturers who are not taking these bold steps now. 

Along with taking control of the North American footprint of the electric car supply chain in North America, GM is currently executing a second supply chain initiative to dramatically lower the number of semiconductors needed in cars. This initiative will limit the fallout from future supply chain shortages of semiconductors.

Recent Results

GM’s stock has been trading between $40.04 (the 52-week low set on January 4, 2021) and $65.18 (the 52-week high set on November 17, 2021). 

GM has brought in revenues of $130.94 billion over the last 12 months with a net income of $11.12 billion. 

The company has reported third-quarter 2021 earnings of $1.52 per share, beating analyst estimates of $0.98 per share. It has also reported $5.74 in earnings per share for the first nine months of 2021, beating analyst estimates of $3.85 for that period. 

Dividend

GM currently does not pay a dividend. This makes sense, the company is using all its free cash flow to make investments in self-driving cars, EVs, and lower the amount of semi-conductors in its cars.  

The company has begun to show strength on its income statement by being able to double its net income from the previous two years. Specifically, the company has reported a net income of $11.12 billion over the past 12 months, while reporting $6.4 billion and $6.7 billion the two years before that.

The company has a current ratio of 1.08 which means that it has more than enough cash and other current assets that it needs on hand to pay its bills over the next year. This is also an improvement. Before two years ago, the current ratio was less than 1.

When I calculated the stock’s intrinsic value by modeling discounted cash flows, I pegged it at $101.20. This was with a large discount rate of 25%. I chose to use such a large discount rate to factor in the risk that GM has with so many balls in the air, or rather, initiatives to beat Tesla, all at once.    

Will The Stock Go Higher

If GM can complete the initiatives that were discussed during the Deutsche Bank AutoTech Conference on December 9,^, 2021, even with twice the time as estimated, GM will be the only car manufacturer that has end-to-end partnerships with suppliers at every level of production of electric cars. 

This includes miners and producers of battery cells all the way through to the makers of semiconductor chips. This is a huge step that will enable GM to control the EV market in North America in the coming decades.

As already mentioned, GM has purchased a majority stake in autonomous driving car company Cruise. It is already planning on rolling out autonomous driving in 2022. 

It will be rolled out in three phases: Super Cruz, Ultra Cruise, and what Doug Parks – -the VP of Investor Relations — has dubbed San Francisco Cruise. 

These three different levels of autonomous driving require different levels of human supervision, with San Francisco Cruise requiring almost none.  Super Cruise has begun being rolled out in GM cars, and of the people who have driven with it, 84% say that they really want or even need future cars to have the Super Cruise feature.

That is a similar number to the percent of Costco members that renew their memberships each year.

Wall Street’s Take

Thirteen Wall Street analysts currently cover GM and have issued 12-month estimates for the price. Of the 13, 11 rate the stock as a Buy, while two rate it a Hold.

The average GM price target of $74.58 represents 22.1% upside potential.

Conclusion

GM has done a great job transforming itself to take on Tesla and compete in the 21st century.  I am excited to see where the company and stock price go from here.

Download the mobile app now, available on iOS and Android

Disclosure: At the time of publication, Tim O’Rourke did not own shares of any stocks mentioned above.