Back in December 2019, General Motors (NYSE:GM) announced a joint venture with a South Korean company in making electric batteries for a new EV truck. However, it is going to be a good while before GM stock catches up to Tesla (NASDAQ:TSLA), both in EV production and in market capitalization.
GM has a market cap of just $42.9 billion at its Friday, Sept. 4, price of $30. But Tesla has a market cap of $389.8 billion. That means Tesla is worth nine times the market value of General Motors.
Moreover, GM is producing losses, but Tesla just reported a profit for its second quarter. Nevertheless, GM is slowly moving into EV production.
GM’s Gigaplant and EV Truck Plans
Its EV battery plant, in a joint venture with LG Chemical (OTCMKTS:LGCLF), being built in Lordstown, Ohio, will produce 30 gigawatts (GW) of capacity. It expects to get the production price below $100 per kilowatt-hour (KWh). This gigaplant will be competitive with Tesla’s plants.
This $100/kWh is important since it is a demarcation line for EVs. This is the point where most analysts believe that it is cheaper to make a battery electric vehicle (BEV) than an internal combustion engine like at GM’s huge production plants.
The plant in Lordstown broke ground in May and now the GM/LG Chem joint venture is starting to build the steel factory structure. It will cost up to $2.5 billion. Moreover, the deal with LG Chem is sort of like Tesla’s deal with Panasonic, but not quite.
For example, GM is going to make the battery packs and LG Chem will make the batteries. However, Tesla buys the batteries from Panasonic, which leases space in Tesla’s gigafactory. But with GM, the JV will own the factory and it is not clear who will own the batteries, or if the eventual truck using it will include a royalty to LG Chem.
However, one thing is clear. This plant has the scale to get costs down. It will be able to produce 300 gigawatt-hours (GWh) of batteries. LG Chem is supposed to have 30% or up to 100 GWh online by the end of 2020.
Since each EV will have 50 KWh in the battery packs, that amounts to 2 million EVs that could be built using this plant’s capacity. By comparison, Tesla is expected to reach 790,000 EV production capacity in all of its plants, including those in construction.
What Analysts Say About GM
So far, analysts are not incorporating any kind of EV premium into the GM stock price. However, 16 analysts polled by Seeking Alpha expect on average GM to return to profitability in Q3 and Q4, as well as for 2020.
So, for example, their average estimate for 2020 EPS is $2.56, and $4.47 in 2021. This puts GM stock on a very low P/E ratio of 11.7 times at the Sept. 4 price of $30. Moreover, it’s trading on a forward P/E multiple of just 4.5 times for 2021.
By comparison, Tesla trades at a 122.8 multiple of earnings for 2021. That is 27 times more than General Motors’ valuation.
Another way to compare this Tesla is on a price-to-sales basis. Analysts expect General Motors to make $130 billion in 2021. This puts GM stock on a price-to-sale of 0.33 times, given its $42.9 billion market cap.
By contrast, analysts expect Tesla to produce $42 billion in revenue by the end of 2021. That puts its $390 billion market cap at 9.3 times 2021 sales. So, again the discrepancy is 28 times over General Motors’ valuation.
And all of this is due to Tesla’s 100% focus on EV production. However, at least GM is moving in the right direction and has an EV plant in progress. Even Ford (NYSE:F) is not as far along as this.
What to Do With GM Stock
One way to look at this is that GM stock is very cheap. Although GM stopped paying its quarterly dividend in March, it still has a very cheap stock price, as I have shown.
Moreover, Morningstar reports that the average P/E ratio for GM stock over the last five years was 15.77. If we apply that multiple to its 2021 respected earnings of $4.47, the stock should eventually be worth $70.49 per share.
That represents a potential gain of $40.49 over the Sept. 4 price of $30, or a 135% gain. Even if that takes two years to achieve, the average annual compound return is 53% per year. That is a good ROI that most investors would be willing to accept.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Mark Hake runs the Total Yield Value Guide which you can review here.
