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.
Growth Opportunities
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.
Crossover Frustrations
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.
Raising Prices
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.
Comments
The truth is the auto market as a whole is not where the market wants to put money.
The simple ever decline in future growth looms in them market for everyone. That is the 800 pound gorilla that they all fear.
The increase in development cost are only going to get worse too. To meet future regulations will require still more investment.
The EV cars will be low profit for a good while yet and with little to any return in the short term has tempered the market.
It is still in the early growth stages and needs time to expand.
The SUV thing has been a small problem but coming out of bankruptcy GM had so many things to do. To be honest it was not like they did not have any SUV/CUV models and they have done well with what they did have.
The biggest issue is cars are going to where you can not really afford them if you are of average income and as they get older they are not worth the cost of repair. This is why companies are looking to ride sharing for the next generation. I still don’t know if this will work well in most places. It is much like the bike sharing where it works some places and other placed they steal the bike.
GM has things in the right spots with controlling cost and ATP on vehicles for the most part. As automakers go they are in pretty good shape but the reality is there are much better investments than an Automaker of any brand right now.
Limited growth, rising cost and limited profits are an issue for all.
GM stock may not jump off the chart but other automakers will fighting to keep their doors open and many will be like Chrysler Fiat looking for a dance partner to merge and share cost with.
If we get hit with low cost Chinese cars that are ever decent it will really hurt.
Well, I would agree with you to an extent on the notion that the auto industry is not particularly attractive to investors. But then you look at Toyota, which the market values at roughly 4x what it does GM, despite Toyota being roughly 1.5x more profitable. That’s a head scratcher, since GM has significantly more earnings/profit potential by growing Cadillac and by improving its performance outside of North America and China. In all, Toyota is over valued but is still seen as very attractive by investors… while is GM undervalued and is not attractive/less attractive.
Toyota is dealing with a high Yen at the moment. When they get that under control, their profits will soar. Additionally, people in the Dow Jones aren’t typically GM customers; so their perception of them and knowledge about their finances and portfolio could be skewed.
I might pickup some shares if it gets down to $28 in the near future. It is hard to pass up a company with a market cap of 50 billion, near 40 billion in liquid assets, a 5% yield, and is currently bringing in 10 billion a year.
They are also dealing with production issues causing low days supply issues thus constraining sales. Also some moderate quality issues on certain products. Once they get those ironed out they are very well positioned with a hybrid line up that is well matched to current customer demand. Their outlook is bright.
Market valuation is about both current profitability and most importantly future outlook. The fact the market puts a 4x valuation on Toyota over gm tells you exactly what the market thinks about Toyota’s direction vs gm’s.
Basically, I couldn’t disagree more with everything else you said. The company is SHRINKING about 400,000 a year globally mostly due to China but also elsewhere. They’re only making significant money in NA and almost entirely in trucks and SUV/Crossovers. That’s it. As for Cadillac, it’s basically a rounding error.
You don’t get a higher market valuation until you prove you can actually GROW a company organically rather than prop-up profitability despite declining sales by relentless cost cutting and price increases. That’s not good management. It’s circling the drain.
Agree with you and Alex both and would only add we all know what will happen when sales start slipping–incentives will start creeping up and margins get squeezed for everyone.
Well here is the deal. There are only a few companies that are in place to weather the storm well if the market slows as expected. Keeping debts low and maximizing income per unit sold are two key factors.
Toyota is a given for weathering the storm just due to their size.
VW was in a good place till the Diesel issue.
GM with many of the changes that Mary has done has put GM in a good spot. Not as strong as Toyota but no where as bad as many others with much higher debts and too little income.
Companies like Chrysler Fiat have no small cars that are of value in America. Profits are low and incentives are off the charts. They are 6 Billion in debt and much of the pay off was bet on the sale of Magneti Marelli for around 3 Billion to lowe their debt. Well the buyer Samsung is not looking at a major issue with the cell phones and a major cut in income so this has put the sale on ice for a while if it happens at all at all.
Many other smaller companies even like Honda will have to have dance partners for development cost. Some will merge some will just share like Ford and GM on transmissions. The key to GM is they have the tech to do the work and let the partner pay for much of the cost.
Even companies like BMW are now working with Toyota to keep independent but cut cost.
Right now what hurts GM is they are coming out of recovery. Chevy is in a good place but Cadillac and Buick still have not gotten all the things they need done competed yet. This is a risk in the eye if the investor as we have yet to see all they are going to do yet.
Now with that said if GM has no setbacks like a Diesel Scandal or another ignition issues they will build on this and be one of the few strong players in the market.
Ford I have not mentioned yet but they have their trucks and a solid line up globally. But they have a lot of debt. As long as they stay product strong they will be ok but if they slip the debt in a slow market could be like the flesh eating bacteria. This is where the chapter 11 for GM was a blessing in disguise. Painful but in the long run it killed the major debt issues they would have had.
Right now GM just need to keep good product coming, keep cost down and manage products smart. Keep inventories to where no incentives are needed and product to where demand remains. Not easy but it can be done.
GMs stock has been slowly falling since Barra took over as CEO. Even though she has done alot to help put GM in a profitable areana and helped pad the back up funds in case of another major economic downturn, I think Wall Street is simply not sold on the good, but still young executive team. Based on all the good news on the balance sheet, there is no reason why GMs stock should be so low.
And as i said before I am not sure how long GMs investors will be satisfied with the status quo of the always lower stock price without some changes having to take place. Also there was some invester backlash when Barra became Chair of the Board which I think in the long run has not helped. More and more companies keep these positions separate now a days. I was fine with Barra as CEO but lost a huge of amount of respect for GMs Board when they again felt it was best to combine the positions. Most of GMs near death recent experiences happen when one person held both positions.
Why did the stock drop.
#1 after the intitial buy in it is normal to have a drop.
#2 There was a little issue with ignitions that is still not 100% over yet and the total cost are not all resolved yet.
#3 Most investment and man power went into Chevy. Buick and Cadillac have not been fully revitalized yet.
#4 Opel is still having money and plant issues.
#5 Chevy had to pull out of Europe at a high cost.
#6 Holden is in transition.
#7 Still too many Plants and Dealers.
#8 China has worked well but how long as their market could drop out if their bubble burst. Where will GM be then?
#9 Russia was a failure and that has not helped. The globalization of GM is one area Mary has struggles with and it does not help.
There is more. None of these issues are fatal issues and there are many smaller isuses that all pertain to income and future protections of a gloomy future market.
Recovery of a large corporation is not unlike recovery from a major accident. It takes time to heal, it takes rehab to fully recover, and it takes investment to pay for it.
I am not sure why so many think that recovery of image and product lines are a 5 -10 year deal even if it is under the best of conditions. With coming out of an economic recession and the added other issues I feel they are doing pretty well. Many weaker companies would not have survived much of what they have in the last 10 years let alone start showing progress in turning a profit.
Over all for GM to be where they are at is amazing but they are still not to where they need to be globally.
Just look at Chrysler and where they are at today. They went Chapter 11 at the same time. They were flat broke with little to work with. They still have no real small cars. They have an very aging RWD platform that has to sell under high incentives. They have Trucks that are now selling with 20% off on the hood, they do have a jeep line that did get some investment and shows what is possible. They gained a partner in Fiat that is mismanaged and about as broke at they are with 6 Billion in debt that is looking to sell assets to pay it down and that is not going well either.
FCA is to the point they need a partner to work with or merge with or they will fail. GM is far from that at this point so while they have their issues they are at least making a slow recovery in spite of their own issues.
Then you have the market They are not in love with the automakers with so much looming. Only the strongest command attention. Technology and the next big thing also draws investors. Many times it makes little sense too.
Tesla has commanded stock prices that really should not be over valued as they have been. The media and PR by Musk leads many like a pied piper. Time is the balancing factor and as long as GM continues to improve I expect them to gain value in the future baring any unforeseen issues just as Tesla that has little chance of making money will fall out of favor at some point.
Logic is not always in play in the market. Some companies get free passes and others have to give blood to gain any small favor.