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Ishan Majumdar
Ishan Majumdar
Articles (155)  | Author's Website |

General Motors: For Conservative Investors Seeking the EV/AV Upside

The company's heavy investments in electric and autonomous vehicles present a strong investment case

March 02, 2021 | About:

The most interesting aspect about General Motors (NYSE:GM) today is how, unlike with flashy new players, the market is not factoring in the future potential of the electric vehicles (EVs) the company plans to launch in the coming five years.

The company delivered a decent quarterly result but continues to be valued as a traditional automaker despite its investments in EVs and autonomous vehicles (AV). While there is slim chance that General Motors would ever be valued at the multiples used for pure-play EV companies like Tesla (NASDAQ:TSLA), I believe that shareholders can certainly expect the company to witness a decent multiple expansion and value appreciation over the years.

EV & AV investments

General Motors is set to ride the wave of electric vehicles. The management has announced its plan to launch as many as 30 new electric vehicles across the globe by 2025 built on its Ultium battery technology. The management believes that this technology uses 40% lower battery pack costs as compared to the Chevrolet Bolt, which was launched back in 2016.

General Motors estimates its second-generation Ultium battery technology could result in a further drop in costs by a staggering 60% as compared to batteries used today. High battery costs are one of the biggest reasons why almost all electric car manufacturers are reporting heavy losses today, including Tesla (NASDAQ:TSLA), which has only reported profits more recently because of the sale of regulatory credits. The lower battery costs associated with General Motor's Ultium technology could be a true game-changer for the company and help earn big profits selling electric cars.

The management plans to be fully electric by 2035 and hopes to conquer even the slightly more challenging markets such as the pickup truck market in the coming 14 years. Government support on this front should also help.

Over and above its technological prowess in EVs, the company also owns a majority stake in AV start-up Cruise, which has received funding from Microsoft (NASDAQ:MSFT) and is valued at $30 billion. Cruise could end up becoming an autonomous version of Uber and possibly provide strong applications for the U.S. Department of Defense. It is expected to become a strong revenue driver for General Motors in the future.

Financial performance

While investors are drawn towards EV start-ups, those with a a more conservative approach to investments may be more attracted to established automobile companies with an already positive bottom line and strong cash reserves that are being invested in the emerging EV and AV technologies.

General Motors definitely ticks all these boxes. In its most recent result for Q4 2020, the company reported a top line of $37.52 billion, which was in line with Wall Street expectations and implied a 21.7% jump over the corresponding quarter of 2019. In terms of operating profits, the company's adjusted Ebit of $3.7 billion was above the analyst consensus of $3.08 billion. It also managed to deliver an earnings beat as the company's adjusted earnings per share (EPS) of $1.93 was well above the analyst consensus estimate of $1.60.

While the global chips shortage might limit the sales volumes of the company in 2021, it should be able to expand its margins by prioritizing high-value car sales.

Fighting the chip shortages

As a result of the Covid-19 disruptions, the chip industry output cut automobile and some other types of chip production and poured the resources towards other tech ventures that were expected to grow in the pandemic. The automible industry was expected to decline.

This has resulted in a huge shortage of chips across the globe in certain sectors, with chip maker capacities not being sufficient to meet demand. The auto industry has a very heavy requirement of semiconductors, which is why General Motors could face limitations in volumes in 2021 given the shortage.

The management has provisioned about $2 billion in revenue loss from the shortage, but there is a silver lining. The company will be focusing on the sales of high-margin vehicles and will be utilizing the semiconductors available. This could result in margin expansion during 2021 and would also result in greater funds available for EV and AV investments.

Final thoughts

Despite the fact that 2020 was filled with manufacturing disruptions caused by the Covid-19 pandemic, the company's stock did gather momentum and appreciated by a staggering 72% in the past 12 months.

Despite this appreciation, General Motors trades at a price-earnings ratio of hardly 12.16, which is among the lowest in the auto industry. This is even though General Motors is fundamentally strong with a net margin of 5.25% and a return on equity as high as 14.9%. The company's enterprise-value-to-Ebitda ratio of 7.37 and its price-sales ratio of 0.62 are relatively low and clearly indicate that the future upside of EV and AV has not been factored into the stock.

Despite the recent gains, I think General Motors remains a very good investment opportunity, particularly for conservative investors who do not wish to risk their money in volatile EV start-ups.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies.

I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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