The year 2019 was challenging for General Motors (NYSE:GM). In particular, four weeks of production loss — due to a strike with the United Automobile Workers — in the fourth quarter impacted the company’s financials. General Motors estimated a loss of $3.6 billion in adjusted-EBIT (earnings before interest and taxes) and $5.4 billion reduction in free cash flow due to the work stoppage. It’s not surprising that GM stock was sideways as the company also faced the impact of a global slowdown in vehicle sales.
The industry headwind is likely to sustain through 2020. The National Automobile Dealers Association expects auto sales in the United States to come in at 16.8 million units. This implies a 1.2% decline in sales as compared to 2019.
Experts also estimate that auto sales in China will decline 2% year-over-year in 2020. Moreover, many have not yet accounted for the coronavirus from China in those calculations. In January alone, China’s auto sales dropped 18% in the wake of the outbreak.
What Makes GM Stock Attractive
Amidst these headwinds, I believe that GM stock is worth accumulating at current levels. My view is backed by the following critical points:
- General Motors has guided for earnings per share in 2020 at $6 (mid-point of guidance). At a current stock price near $35, GM stock is trading at 5.8 times 2020 earnings. This suggests undervaluation considering the fact that the S&P 500 is trading at a price-to-earnings-ratio of 24.1.
- General Motors recently paid a quarterly dividend of 38 cents. This implies an annual dividend of $1.52. Considering the current stock price, GM stock offers an attractive dividend yield of 4.4%. This yield looks sustainable.
- Even with headwinds, General Motors is forecasting free cash flow of $6.8 billion (mid-range of guidance) for 2020. This will give ample headroom to improve the cash buffer and pursue deleveraging.
General Motors Will Benefit From Electric Vehicle Push
I mentioned earlier that auto sales are likely to remain sluggish in 2020. However, there is optimism related to growth in the electric vehicle industry. The global EV market is expected to grow at a compounded annual growth rate of 22.3% between 2018 and 2025.
With General Motors focused on expanding its EV portfolio, there is visibility for growth in 2020 and beyond. The company is already investing $2.2 billion in its first assembly plant that is 100% devoted to electric vehicles.
It is worth noting that the company will focus on production of all-electric trucks and SUVs. Going by the sales trend for Ford Motor (NYSE:F), its trucks and SUVs are driving growth as car sales slump. Therefore, with General Motors planning to launch the GMC Hummer electric vehicle in 2021, the future seems promising. GM also expects most Cadillac vehicles to be electric within the next ten years.
Morgan Stanley is bullish on GM stock with a base case price target of $46 and the bull case target of $70. A key reason for this bullish view is the company’s effort to electrify the fleet. Even the base case price target implies 33% upside from current levels.
My Concluding Thoughts on GM Stock
I want to come back to the point that GM stock trades at an attractive value. The stock currently trades at a market capitalization of $49.6 billion. If we consider the last round of funding for GM Cruise, that business is valued at $19 billion alone. In the coming years, as the autonomous vehicle market gains traction, GM Cruise can be a potential game changer. I will not be surprised if GM Cruise is spun off as a separate entity in the coming years.
Overall, General Motors is in a period of transition with higher focus on electric vehicles, pick-up trucks and SUVs. The next few years are critical in terms of market acceptance of electric vehicles.
I do believe that General Motors can make inroads in the EV market and that those inroads can trigger renewed top-line growth. Even with subdued growth visibility, GM stock is attractive and worth considering at current levels.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.
