General Motors is in somewhat of a precarious situation: despite posting record profits and having an even brighter outlook for the next few years, pessimism on Wall Street is depressing the price of its shares. The dilemma is one GM president Dan Amman faces on a daily basis, according to a recent interview with Bloomberg.
To wit: the automaker generates $1 billion in pretax profit per month. It posted a record net income of $9.7 billion in 2015 and is forecasted to earn $9.2 billion in 2016. Calendar years 2017 and 2018 are expected to deliver similar or even better results. Yet the people who make their making financial investments for others are not sold. At $31.68 per share, the value of GM’s shares has decreased about 7 percent in 2016 to below the 2010 IPO price of $33. The shares reached an all-time high of $41.53 in December 2013, but didn’t stay there long.
The aggregate value of the GM’s shares values the company at $50 billion. To put that into perspective, rival Toyota Motor Corp. is sitting pretty with a market cap of $191 billion, Daimler AG — the parent of Mercedes-Benz — is valued at $75 billion, while Volkswagen AG is valued at a slightly lower $70 billion. Tesla, which sells a couple thousand vehicles per month compared to nearly 1 million vehicles sold globally by GM, has a market value of $30 billion.
Far from giving up on the situation, GM has a few plans up its sleeve that will enable fiscal growth over the next several years. The biggest and most prominent of these is an insurgence of new crossovers and SUVs, which typically carry high margins.
Ammann and GM CEO Mary Barra have been contesting Wall Streets’ notion that the traditional car market has peaked. Not helping their cause is cross-town rival Ford Motor Company recent lowering its own earnings forecast.
As if bearish industry expectations weren’t enough, investors are further discouraged by the fact that GM is quite late in bringing to market a new range of crossovers that typically command high margins. Though new CUV entries such as the new Chevrolet Equinox, 2018 GMC Terrain, 2018 Buick Enclave, and 2018 Chevrolet Traverse are expected to go on sale throughout calendar year 2017, but some investors believe that GM should have brought these vehicles to market sooner in order to capitalize on significant growth in the crossover space.
Investors are also astounded that GM’s luxury brand, Cadillac, only has two SUVs in its portfolio — the midsize XT5 crossover and the full-size Escalade SUV. In contrast, direct rivals have significantly more of such vehicles: BMW and Mercedes-Benz have five crossovers each, Audi has three and Lexus has four. All four are working on bringing even more crossovers to market. For its part, Cadillac has stated that it will add four crossovers to its lineup in the next three years, plans that Ammann confirmed during the interview. Even so, investors fear that it might be too late then to capitalize on the red-hot boom in luxury CUVs.
A big win for GM is that it has steadily raised the prices of its vehicles. In 2016, the average purchase price of a GM vehicle was $35,000 per car. That’s $1,000 higher than in 2015, and $5,000 higher than the industry average.
Perceptions vs. Reality
Perhaps GM’s biggest hurdle when it comes to Wall Street is one of perception. The company continues to carry an old-school, outdated image compared to its rivals.
In discussions with investors, Morgan Stanley analyst Adam Jonas found “great apathy and skepticism” toward GM. “Sentiment appears even lower than we had previously thought,” he wrote in a recent note to investors.
Investors appear to be receptive of seeing (or hoping for) innovation from the likes of Google, Apple, and Uber. At one point, all three firms had plans to perfect self-driving vehicles and/or ride-hailing apps, which could replace individual car ownership.
Ammann sees such technological advances as an opportunity rather than a threat. Currently, personal vehicles travel an average of 15,000 miles a year. By contrast, a vehicle in a ride-sharing service could go as many as 80,000 miles, thereby necessitating replacement or perhaps some form of refurbishing far more often, said the executive.
Ride Sharing Services Threats & Opportunities
Silicon valley technology stalwarts such as Google and Apple have been characterized as threats for “traditional automakers” like GM, but rumors of autonomous/driverless cars from the firms have recently subsided, which to some extent, has removed the big shadow cast on traditional automakers during the past year.
Google has indirectly suggested that it might not build a car, while Apple’s plans for its Project Titan automotive program are unclear. Most recently, Wall Street sweetheart, Tesla, was criticized by some investors for a proposed merger with SolarCity.
GM believes that car sales will continue to be steady and profitable.
“The core of where we make money will be sustained for a long time to come,” said Ammann. “We are delivering real results and we see opportunity to grow.”
Even so, the automaker is far from being passive in the nascent ride sharing and ride hailing spaces. In the beginning of 2016, it invested $500 in Lyft and is renting cars to Lyft drivers, particularly vehicles customers leased and returned to dealers at the end of the lease cycle. This unique development presents quite an interesting opportunity, since it provides GM with a new source of revenue on used cars, a business where most of profit is typically taken by dealers. A secondary benefit of selling lightly used vehicles or lease returns to Lyft revolves arund residual values, as it keeps used cars with low mileage from going to the used-car market, preventing them from undercutting prices of new cars.
The rest of GM’s ride sharing strategy is seen as shaky at best. Despite growth, Lyft is significantly less popular than market-leading Uber, whose financial position was recently bolstered by an investment from Chinese ride-share company Didi Chuxing.
Ammann wouldn’t say whether GM is looking to work with Uber via vehicle lease program (something Toyota has agreed to do) or by jointly developing a fleet of self-driving cars as it has with the Lyft and the new Bolt EV.
“The ride-sharing business is in its early days, and we’re in the early days of the shift from ownership to sharing.”
(Some) Investors Are Taking Note
Despite obvious pessimism, some Wall Streeters are hearing the message and taking note: according to Bloomberg, nine of the 23 analysts covering GM have some version of a buy rating on its stock and just one has a sell rating.
The value of GM’s shares rose 2.4 percent in September after a recommendation from Morgan Stanley’s Jonas, who has notoriously been a long-time bull for Tesla and considerably down on Detroit’s venerable automakers.
He reasons that GM’s core business will continue generating stable profits for the next two years, and that Silicon Valley tech that could transform the industry are further off than many would like to think. His recommendation for GM came months after he downgraded Tesla.