Addressing Vast Discount, GM Is Prepared for Weaker Economy
The automaker is under-appreciated by Wall Street and its share buyback program sets it up well for the future, even in a recession.
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As the recent growth scare exemplified, investing is more rewarding when the market discounts stocks for bad economic outcomes. For General Motors GM, trading at a discount due to worries of impending economic gloom has been perpetual. The company is finally taking matters into its own hands to address the vast discount.
For years, GM shares have been stuck in neutral with a single-digit price-to-earnings ratio (p/e) due to regular concerns about peak earnings, competition and an economic downturn that will dent profits. Shareholders, however, saw little benefit from impressive execution and steady profitability as cash flow was spent preparing for the future EV and AV revolution.
GM recently changed course to a more balanced approach, with a significant portion of its copious cash flow directed toward share buybacks, vastly reducing shares outstanding and increasing earnings per share. With a free cash flow yield of over 20%, buybacks are having a material impact on earnings.
GM reported a stellar quarter in late July with EPS up 60%. Still, concerns about economic weakness and rising inventory led to a 20% pullback, lowering its p/e from 5 to 4, as its EPS rocketed from $7.69 in 2023 to Wall Street consensus of $9.94 for 2024. Shares have since rallied back with the market. The accretive buybacks have helped bolster EPS with outstanding shares reduced by 17%, from 1.37 billion to 1.12 billion in the past year. GM’s management has consistently deemed the shares highly undervalued and offered a plan to reduce the share count to under 1 billion, another 11% reduction.
Buybacks are pivotal but come after GM’s priorities of investing in its business success and maintaining a solid balance sheet. However, if business remains strong and Wall Street continues to value the shares at one of the lowest in the S&P 500, the percentage of shares they’re buying quarterly can remain the largest of any company in the S&P 500.
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Overall, GM has been laser-focused on costs and margins while gaining market share by building refreshed vehicles that consumers prefer. A recent layoff announcement of 1,000 workers underscores their quest for efficiency. Although the auto sector is notably cyclical, GM performed well throughout recent cycles by managing costs and maintaining low inventory.
While inventory has been creeping higher, GM has intentionally put more EVs on dealer lots for consumers sorting through the pros and cons. Admittedly, GM wasted vast amounts of capital creating buzz for their EVs before they were available. Now, they’re rolling out the broadest portfolio of EVs of any automaker, and their EV inventory doesn’t amount to more than a few cars per model at dealerships. 54% of EV purchases are from consumers new to GM, so the strategy is having an impact. Overall, GM’s business is benefiting from much slower EV penetration than predicted but they’re much better prepared for an EV future, including a remodeled Ultium-based Chevy Bolt coming in 2025.
While Ferrari RACE garners an enormous valuation, around a 50 p/e, GM gets little credit for revitalizing the Corvette brand. The redesigned Corvette, with the motor in the rear, has helped increase sales by over 50% from five years ago to near-record sales in 2023, matching Corvette’s peak sales in 1979. The new C8 Corvette E-Ray hybrid has gotten stellar reviews and has attracted a far younger demographic to the brand.
A significant worry for GM investors and the auto sector at large is how the Chinese market become competition-filled due to the dramatic rise of Chinese EV automakers. GM’s market share in China has been cut in half from 15% to 7.5% in seven years and its profitability has been competed away. Chinese automakers face numerous challenges in entering the U.S. market, yet the specter of declining margins from an increased competitive landscape is always a cause of concern.
Even as GM continues to buy back shares, investing in its autonomous division, Cruise, has remained a priority. Widely publicized challenges at Cruise surfaced during their initial driverless foray, including the suspension of their California permit after, in the ultimate edge case, a Cruise vehicle dragged a pedestrian who was flung in front of the AV after a hit-and-run incident. Nonetheless, the 5 million miles of autonomous drive have laid the groundwork for a successful reemergence. Mary Barra, GM’s CEO, noted a “significant outside interest from a partner and investor perspective” for Cruise in July. GM subsequently announced a partnership with Uber UBER to begin in 2025.
Admittedly, the value and viability of Cruise is difficult to ascertain. The good news for investors: it’s a moonshot opportunity with little to no valuation baked into the stock price due to ongoing losses. Tesla TSLA, on the other hand, has seen its market cap increase by multiples of GM’s just from a whiff that they may have robotaxis on the road in the next few years. Any outside investor in Cruise, adding to ownership stakes by Walmart WMT, Microsoft MSFT and Honda Motors, would be a significant plus.
At a recent conference, GM’s CFO updated that business has continued performing in early August through the brief stock market swoon. They’ve also continued to pick up market share as their refresh cadence improves. During the recent pullback, he bolstered his confidence that shares are a bargain by purchasing 25,000 shares around $44.
Several automakers are struggling, causing investors to avoid the sector entirely. Ford F has suffered from quality problems, leading to outsized warranty expenses. Ford has issued more recalls in 2024 than GM, Honda, Toyota, Nissan, VW and BMW combined. Stellantis has been weighed down by high inventories for the last couple of years. Tesla has struggled with declining margins and flat sales while relying on other businesses for growth.
Even if the auto industry is headed for a more challenging period — an annual prediction by many analysts — GM is well-positioned to execute and weather a weaker economy. The stock already bakes in peak earnings, yet highly accretive buybacks at a p/e under 5 have helped EPS increase dramatically. With few believers on Wall Street, GM plans to continue its campaign to buy back shares aggressively. If the economy hangs in with the help of lower rates, the shares won’t stay on the bargain bin.
At the time of publication, Ginesin was long GM and MSFT.
