General Motors Company Has 20% Upside, Analyst Says (GM)

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GM stock - General Motors Company Has 20% Upside, Analyst Says (GM)

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Depending on who you ask, the recent boom in U.S. auto sales has peaked, which has caused investors to shift gears in terms of auto expectations. But that didn’t stop Morgan Stanley analysts from upgrading shares of General Motors Company (NYSE:GM) on Monday.

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The question is: What effect, if any, will this vote of confidence have on GM stock?

On Monday, Morgan Stanley raised its rating GM stock to “overweight” from “equal-weight.” The firm also bumped its price target on General Motors to $37 from $29 per share.

General Motors shares closed on Friday at $30.97, which suggest Morgan Stanley believes the Detroit-based car maker can deliver additional premiums of around 20%.

While a 20% premium is not an outrageous number, it would nonetheless be a pretty aggressive target for GM stock. Consider that if General Motors were to reach $37, that would mark not just new 52-week highs, but it would put the stock just 10% away from its all-time high of $40.87 reached in December 2013. Morgan Stanley is expecting solid growth from General Motors.

However, the rest of the market does not. GM stock trades at less than six time fiscal 2017 estimates of $5.76 per share.

Morgan Stanley’s Take on GM Stock

“We believe GM’s businesses can remain relevant and profitable for longer than the market thinks,” Morgan Stanley said on Monday in a note to investors. “A move to Auto 2.0 requires a lengthy transition period (Auto 1.5) during which time GM can generate cash, return cash and nurture new businesses with potentially positive terminal values.”

The new buzzword in the realm of autonomous vehicles, ride-sharing technology and self-driving buses, “Auto 2.0” refers to what many analysts and auto enthusiasts expect will be a global disruption in the auto market. It’s the power play being applied by the likes of Tesla Motors Inc (NASDAQ:TSLA), Uber Technologies and Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL) subsidiary Google. Last week, General Motors rival Ford Motor Company (NYSE:F) announced its presence in the race.

Can General Motors make a dent in this area? That remains to be seen. But Morgan Stanley — which believes GM can deliver flat earnings 2017 and 2018, compared to consensus estimates for declining earnings — seems encouraged that General Motors has entered the race. It’s just not looking too far ahead.

“There are lots of cars with steering wheels left to sell,” Morgan Stanley said.

In terms of flat earnings for fiscal 2017 and 2018, which implies about 5% upside to consensus, the firm said, “If that happens, the market likely will be positively surprised. We believe even stable earnings through 2018 would demonstrate a material inflection that could drive both further FCF generation and the share price.”

Bottom Line for General Motors

Traditional auto powers like General Motors must respond aggressively to Auto 2.0 to remain relevant. And while these investments will cost money, impacting the company’s already low profit margins, GM should be fine to the extent the company can continue to grow market share in the U.S., while leveraging its  growth in SUV and luxury segments in areas like China.

General Motors should be able to withstand near-term competitive pressures, and GM stock will prove Morgan Stanley correct.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/09/general-motors-company-gm-stock-upside-morgan-stanley/.

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