Don’t Underestimate General Motors (Trade and DD)

First movers are overrated. For example Apple wasn't a first mover and neither was Microsoft. The established empire by GM is making all the right moves to be a market leader as the automotive industry moves over to Electric Vehicles (EV) en masse.

The following piece presents how General Motors stock still remains quite undervalued just as its business enters the next phase of growth. GM is a quality long term risk/reward play [from now to at least 2025-2027] given:

• The firm enters the EV market with scale that first movers may not ever achieve.
• Incumbent market share gains in Europe bode well for GM fast follower strategy.
• Tesla’s weaknesses are General Motors’ strengths.
• Expectations for GM and TSLA remain disconnected from fundamentals.

Today GM is leveraging its 100+ years of history of manufacturing expertise to build EVs and enter the market when there’s enough demand to justify the number of EVs it needs to sell to be profitable, an achievement that escapes the “first movers” in EVs. For a large company like GM or any of the incumbents, it doesn’t make financial sense to enter a niche market when there’s not enough demand to realize its manufacturing, marketing and distribution scale advantages. It’s better to wait and enter the market when it can exercise its scale advantages to generate superior profits. GM is investing billions to convert more plants to EV production and enter the EV market with scale that the first movers have yet to achieve. GM manufacturing, marketing, distribution scale advantages give it the ability to produce and sell a higher volume of cars with lower cost and higher quality and as a result, realize much higher profit margins than first movers. Europe and China are leading indicators.

Bears argue incumbents will fade out because they cannot produce ICE and electric vehicles at the same time. Volkswagen has already proven this argument wrong. In 2020 VW had the most popular ICE model in Europe and most popular EV in Europe, while expanding its overall market share. Tesla’s first mover advantage is waning. Steep market share losses in Europe and China portend losses for Tesla across the world. Incumbent ICE manufacturers, such as GM and VW have the necessary manufacturing scale to bring large numbers of high-quality EVs to market they can sell at a sizeable profit.

Current Setup

General Motors has eight brands and operates in four segments: GM North America, GM International, Cruise, and GM Financial. The company has manufacturing plants in eight countries. Its four core automobile brands are Chevrolet, Buick, GMC, and Cadillac.

GM was the U.S. market share leader in 2020 but dropped down to second place in 2021, dethroned by Toyota. GM is expected to reclaim back the top this year/next year as the chip shortage alleviates.

Future Growth

General Motors long-term revenue growth plans include more than doubling company revenues from current levels to a range of $275-315 billion by 2030. To be achieved through a 4-6% CAGR in its core auto business and a 50% CAGR in software and new businesses. This growth comes with higher margins which are expected to be 12-14% by 2030 due to higher margins in EVs when scaled to size and the lower expected future cost of electric batteries. The new, non-auto businesses are expected to have greater than 20% margins.

2021 Financial Results

GM had a good 2021 with revenues increasing 3.7%, with the Auto segment increasing 4.5%. Operating income increased 40.5%, and net income increased 55.9%. The auto business is a capital-intensive business with high levels of capital expenditures, yet the company has been a generator of free cash flow recently. In 2021, company wide operating cash flow was $15.2 billion, and capital expenditures were $7.4 billion.

In terms of the automotive segment only, liquidity was strong at year-end with cash and marketable securities of $15.2 billion and $21.6 billion availability on the company’s credit facilities. Total debt stood at $16.8 billion, and pension liabilities were $5.1 billion. However, those pension liabilities improved substantially from the previous year due to a $3.7 billion favorable impact from the financial returns in those pension plan investments. In addition, there was a $2.1 billion decrease in benefit plan obligations, largely due to increases in prevailing discount rates.

The Super Line-Up

GM plans to launch over 30 EV models globally by 2025. A core element in this EV strategy is Ultium, the company’s new dedicated electric battery platform. GM has more than 190,000 reservations for electric vehicles in North America so far. More than 110,000 are for the Chevrolet Silverado EV alone, with 59,000 for the Hummer EV pickup truck and its SUV offshoot, and more than 25,000 for GM’s BrightDrop brand of electric delivery trucks. Now teasing the Equinox and Blazer. Next up the Cadillac LYRIQ.

Ultifi is GMs end-to-end software platform that will provide customers with software-defined features, apps, and services over-the-air starting in 2023. The software platform is expected to produce $20-25 billion in stand-alone revenues by 2023. The company also expects to build manufacturing capacity for over one million electric vehicles by 2025.

A full list of their EV range is worth a deeper dive.

The Future of Transportation

Yes Electric Vehicles, however full Autonomous Vehicles (AV) are where billions and billions of revenues are going to get made and a lot of players get shaken out. The autonomous (driverless) car market was valued at USD 22.22 billion in 2021, and it is expected to reach USD 75.95 billion by 2027 while registering a CAGR of 22.75% during the forecast period 2022-2027.

So how is GM working toward Autonomy? First, EV batteries..

Let’s start with the heart of the AV – the battery. GM has long outfitted its EVs with lithium-ion (Li-ion) batteries, and other automakers have followed suit. Though alternative compounds like lithium-sulfur, sodium-ion, zinc-ion, and aluminum-air setups have promise, they’re far from universal. Until a new technology attains large scale viability, manufacturers will refine their lithium-ion units. GM recently unveiled its new Ultium battery technology. Ultium was recognized among Fast Company’s “Next Big Things in Tech 2021” Ultium relies on a pouch-type Li-ion cell, and these cells form modular battery packs. Based on a nickel-cobalt-manganese-aluminum chemistry, these units are easy to scale up or down to match desired vehicular platform meaning larger vehicles can utilize a larger kWh pack, while smaller cars might incorporate a pack with less power. GM’s Ultium battery ranges anywhere from 50 kWh to 200 kWh in capacity.

Tesla gets a vast majority of the attention in the autonomous driving space, but there are a lot of other companies vying for market share long term. Alphabet's subsidiary Waymo is one of the market leaders, and Niro is already delivering pizzas autonomously in Silicon Valley. The company we're underestimating is GM and its subsidiary Cruise. Cruise is already offering fully autonomous ridesharing in the San Francisco area. GM is supporting Cruise, which it has a majority ownership position in, by manufacturing the Cruise Origin and extending $5 billion in credit for Cruise to build out its fleet. Cruise's value alone may make GM stock undervalued.

Companies like Tesla have been talking about autonomous driving and “robotaxis” for years but in California, which has a robust regulatory structure for autonomous vehicles, there are only seven permit holders for driverless testing, including GM's Cruise, Alphabet's Waymo, and Amazon's Zoox. Only three companies – Cruise, Waymo, Nuro – have a permit to deploy autonomous vehicles for commercial purposes. Cruise is already taking customers on driverless rides in the Bay Area, you can witness their buzz showcasing a huge change in society has arrived!

It's going to require billions of dollars to develop and deploy autonomous fleets. It's hard to gauge exactly how much the autonomous ridesharing business will be worth long term, but I think it's safe to say it will be big if companies like Waymo and Cruise can prove that it's safe. One comparison is to Uber and Lyft, which have generated approx $17.5 billion and $3.2 billion in revenue respectively over the past year.

The U.S. government estimates there are 3.2 trillion vehicle miles traveled annually per year. The table below shows revenue estimation for autonomous ridesharing if the business performed 0.1%, 1%, and 5% of all vehicle miles long term and charged just $1.50 per mile.

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Given the potential cost advantage, I don't think it would be crazy to think the autonomous ridesharing market could be over 5% of all miles driven in the U.S. a decade from now. Remember that Uber wasn't founded until 2009, and that year it reached 10,000 cities around the world, 111 million monthly active customers, and 6.9 billion trips. Ridesharing can become a big business very quickly and GM with Cruise has the technology and financial backing to build a huge network fast.

Competition and Moats

Just recently, pick up trucks and SUVs now dominate the 10 best selling vehicles in America, it would appear General Motors and Ford have the edge. The Tesla Cybertruck was first revealed in November 2019, two months before General Motors announced the Hummer name was returning on an all-electric truck. Both high-performance pickups were scheduled to enter production in 2021, but only one of them did. And it wasn’t the Tesla.

There isn't a runaway leader yet in terms of outselling so it's all still very competitive. Essentially Tesla, GM, and Ford are in a cage match for EV dominance.

While GM technology may have lagged behind Tesla in the early stages, it is quickly catching up. Tesla is having an increasingly difficult time trying to improve quality, it regularly issues a recall of thousands of vehicles. GM strengths enable the firm to compete and succeed in a more mature EV market. GM competitive advantages include

• An existing cash generating business helping to fund $27 billion of EV and autonomous driving investment.
• Battery technology. Ultium battery pack will offer 400 miles of range to help eliminate concerns over EV range restrictions.
• Microsoft collaborating with General Motors’ Cruise on self driving technology and may be ready to take the lead with the new Ultra Cruise system it plans to put on the road by 2023.
• GM investing in its own battery cell manufacturer which gives “access to the cells and work on cost improvements and technology advancements.”
• Existing production capacity can be efficiently converted to produce EVs at scale.
• Manufacturing expertise to provide higher quality vehicles and use new technologies, such as Ultium Drive to quickly scale manufacturing of all of its next generation EVs.
• GM owns 80% of Cruise, the company who launched driverless taxi service in San Francisco in 2020.
• EV technological advancement by GM trusted by Honda to build two of its EV crossovers.
• GM’s JV in China the best selling EV in China, the Hongguang Mini, outselling Tesla.
• GM is rolling out Apple CarPlay and Android Auto in many of its 2021 and future models.

Valuation Still Prime

The company expects full-year 2022 net income to be in a range of $9.4-10.8 billion and adjusted operating income to be in a range of $13-15 billion. This assumes continued steady demand for new vehicles and no significant new economic or supply chain challenges.

With a PE ratio of 6.41 and EPS of 6.70 you'll be hard pressed to find a growth-value stock like this.

Conclusion

Bullish on GM for long term investors. Although the company may face economic cyclical challenges in the future, the strategic growth plan is likely achievable. In addition, GM could reinstate its dividend. Investors also get exposure to the China auto market which should be another growth factor for the company over the long term.

Autonomy and battery tech is becoming a moat in the auto industry. Brands like Ford and Toyota may not go away, but the few companies who have battery and autonomy advantage will become the manufacturer and operating system for all brands. My belief is GM to be one of the companies that will emerge as a leader.

Just as the researchers for Wall Street failed to find the correct price target for Tesla and doubted its survival back in 2019, GM hasn’t changed their narrative yet. It could be optimism however this stock likely has a lot of room to run due to potential margin expansion. Also any negative comments on this post suggest GM’s future in EVs, battery tech and autonomy is NOT priced in.

At present GM is the fourth highest selling auto manufacturer around the globe (after Toyota, VW, Hyundai Kia), GM sold approximately 6 times more vehicles than Tesla in 2021, and GM outsold Ford in total trucks last year.

Yesterday picked up a medium sized amount of GM stock. Long term play for me. The battle of the EV governor has just begun, buckle up. Not financial advice, and do your own DD, if you dare to venture into the volatile auto sector – now more than ever.