Impressive Results From GM Are A Boost Of Confidence
Contributor since 2016 / 965 Followers
Summary:
- GM’s Q3 results exceeded expectations, driving an 80% share price increase over 12 months, outperforming the S&P 500 and competitors like Tesla and Ford.
- Despite lagging in the electric vehicle market, GM’s overall sales and profitability have surged, with expected revenues close to $200 billion this year.
- High leverage and capital expenditures constrain GM’s free cash flow, limiting shareholder returns through dividends and buybacks in the near future.
- With a tempting P/E ratio of 5.5x, GM’s valuation is attractive, but risks like high capex, tech changes, and potential policy shifts remain.
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GM (NYSE:GM) showed off impressive Q3 results on the 22nd of October, and it was rightly rewarded by a 10%+ jump in its share price and its market cap – taking the share price gains to 80% over the past 12 months, and reaching the highest share price in almost 3 years. The growth of GM’s share price was double that of the S&P 500, and 80 times higher than that of Tesla and of Ford – both remaining stagnant over the past 12 months. Wow.
Are investors overoptimistic or is it justified?
GM has delivered forecast-busting Q3 results, as well as provided a confident outlook for the full year. Quarterly revenues reached US$ 49 billion, increasing by 16% – double average analyst expectations whose consensus forecast was an 8% increase. Operating profit came in 22% higher than estimates.
Guidance from management for full year 2024 was upgraded across the board; net income is now expected in the range of US$ 10.4-11.1 billion versus previous estimates of US$ 10-11.4 billion. But more importantly; automotive free cash flow has been significantly upgraded to US$ 12.5-13.5 billion versus US$ 9.5-11.5 billion previously. That is a third higher, and is a considerable boost for investors; the more free cash flow, the more capacity the business has to share the spoils with shareholders.
Market share was maintained in the US at 16.5% but declined in China – the company’s largest market – as well as in Brazil by 2% in each market. Trucks remained the strongest business of GM, with a market share of 30% in the US market versus a 5% share for cars and 13% share for crossovers.
CEO Maria Barra noted her expectations for adjusted EBIT in 2025 to be similar to that of 2024 at around US$14-15 billion, and for growth drivers to come from improved profitability for electric vehicles along with increasing sales and market share, more profitable redesigned SUVs, cost and capital expenditure efficiencies, and a push to improve performance in China.
The plans and estimates of management are realistic, manageable, and they inspire confidence in a business that is stable and on a slowly but surely growth path.
The company expects to produce 200,000 electric vehicles this year – which would not be profitable but would at least be covering cost of production, for a start. The volume is a fraction of the 2 million vehicles that Tesla will be producing this year, and does not put GM on the map yet in the electric vehicles market. Sales of electric vehicles increased by 35% last year, and are six times higher than five years ago. This compares to 10% for overall car sales, with single digits growth over the previous five years. GM is expected to reach close to US$ 200 billion of sales revenues this year – 45% higher than five years ago. Despite being a laggard in the electric vehicles market, GM is not a laggard in supercharging its sales and profitability growth.
Leverage and high capex requirements will continue weighing down on shareholder returns
Net debt of US$ 95 billion cannot be taken lightly. It represents a whopping multiple of 4.5 times operating cash flow, and consumed US$ 5.5 billion of interest payments in 2023. This is an improvement from 5 years ago, when net debt to operating cash flow was an even more whopping 5.3 times. The company’s net debt grew by 18% over the past 5 years, but its net income grew by almost 50%, and operating cash flow by 40%. This is positive, and is a sign of more financial efficiency at the company.
Nevertheless, with such high capital expenditure requirements that are characteristic to the business, in addition to the additional burden of playing catch-up in the electrical vehicles space, total debt will only head north in the coming years. Combined with annual high capital expenditures – exceeding operating cash flows in each of the past 5 years, by up to 40% on an annual basis. The constraints on GM’s free cash flow are expected to continue, constraining with it the capacity to increase returns to shareholders through dividends and buybacks. Dividends paid out were a meager US$ 500 million in 2023 – this is not expected to increase massively in the near future.
Cruise is improving but not by much still
GM invested over US$ 8 billion in self-driving vehicle innovator Cruise – almost half of which were burnt by Cruise in 2023. Whether this investment will finally pay off remains to be seen sometime far ahead in the future. After being bogged down by fatal incidents that almost called time for Cruise’s life early in its life, Cruise has managed to survive is trimming down losses to ‘only’ US$ 400 million in the past quarter. It will be quite sometime before Cruise can start generating shareholder returns – or before even GM can assess whether that investment was ill-fated.
Valuation very tempting
With a P/E ratio of 5.5x – even after the 80% increase in share price over the past year – an investor might wonder where the catch is. Tesla has been always trading in a world of its own, closer to 70x. Even Ford – which lags behind GM in multiple parameters – trades at 11x. German peers BMW and Mercedes are both at 4.6x, however. Market cap to operating cash flow is only 2.6x. Free cashflow to market cap is 20%; that is a really remarkable return on investment, and further confirmation of the modest valuation of the business.
Risks
The automotive industry is never smooth sailing. Challenges and risks are hard to count, but include permanently high capital expenditures, fast changes in technology, labour strikes, supply chain issues, breakneck competition – you name it. Legislation changes is another flagging risk, especially with the possibility of Trump scaling back subsidies on electric vehicles if he wins the elections next month.
Why do I think GM is a hold
GM has a lot of attractions for investors; the strong and consistent sales delivery, really impressive profit margins and free cashflow delivery, venturing into EV sales and self-driving prospects, strong management, and very modest valuation. There are multiple challenges and risks, however, that dog the industry and the business. And the share price has already jumped by 80% over the past 12 month, and is in overbought territory, according to some parameters. If you hold GM’s shares already, enjoy the returns and keep it. For add-on investments or a new entry; some discount on the share price would be more enticing.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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