General Motors Playing Catch Up
publication date: Nov 5, 2020
author/source: Brian Nelson, CFA
Image: Hummer EV. According to General Motors’ website, the Hummer EV will be a “zero emissions, zero limits all-electric supertruck.”
By Brian Nelson, CFA
Most of the headlines focused on General Motors (GM) the past couple months had to do with its relationship with flailing electric heavy truck maker Nikola (NKLA). With GM’s executive suite largely distracted from the goings on at Nikola, Tesla (TSLA) has quietly changed the game in the bread-and-butter pickup heavy duty pickup truck market with last year’s launch of the company’s Cybertruck (view the unveil here). Investors will be hearing more about the Cybertruck soon.
From our perspective, General Motors is playing catch up. It took Tesla’s successful launch of the Cybertruck in November 2019 for GM to take the leap to bring the Hummer EV to market. This is yet another example of how the Big 3 automakers have fallen behind Tesla CEO Elon Musk’s entrepreneurial strides and forward-looking thinking. The Cybertruck looks to start with a price tag under $40,000, too, while it seems the initial Hummer EV pickup will start at $112,595. At more than three times as much, the Hummer EV may be too pricey for mainstream.
In any case, GM is working to get back on track, and its third-quarter results, released November 5, weren’t too shabby. Net revenue in the quarter was flat on a year-over-year basis, while net income and EPS-diluted jumped 74%. Auto operating cash flow also improved considerably, to $9.9 billion, from $4.9 billion in the same period a year ago. Adjusted auto free cash flow came in at $9.1 billion during the third quarter versus $5.4 billion in last year’s period. Here’s what interim CFO John Stapleton had to say about the quarter:
Sales in the U.S. and China are recovering faster than many people expected, and GM is benefiting from robust customer demand for our new vehicles and services, especially our full-size pickups and SUVs. These strong fundamentals and the positive impact of our transformation and austerity measures are helping us to deliver solid earnings, generate significant cash and quickly repay the debt we incurred during the early days of the pandemic.
GM ended the third quarter with $37.8 billion in automotive liquidity, and it has been repaying its revolving credit facility thanks in part to billions in cost savings it was able to achieve through the course of the ongoing pandemic. GM Financial contributed to profitability, while the company noted that GM’s sales in China (MCHI, FXI) increased 12% on a year-over-year basis thanks to strength at Buick and Cadillac. Management expects that “in the next five years, more than 40 percent of GM’s new models in China will be new energy vehicles.”
GM’s financials are messy with the company adjusting in presentation key earnings, cash flow and liquidity items due in part to the convoluted nature of consolidating its financing arm into key financial statements. Investors have traditionally discounted improvements at GM’s auto operations given the outsize risk (financial leverage) that its financing arm has posed during depths of the economic/credit cycle, the best example during the Great Financial Crisis, when bad loans and reduced auto demand led to a bankruptcy filing.
Today’s GM is in much better shape than it was during the Great Financial Crisis when it succumbed to legacy issues as evidenced by its resilience during the COVID-19 meltdown, but the reality is that operationally-leveraged cyclicals with sticky costs, messy financials, and encroaching rivals don’t tend to command a large multiple. Throw in the opaqueness of its financing arm, which adds $88.9 billion in long-term debt to the balance sheet as of the end of last year, and GM becomes too difficult a stock to own, in our view. At $36 each, GM’s shares may have bounced back a bit too much based on our fair value estimate. We continue to prefer our best ideas.
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Brian Nelson owns shares in SPY, SCHG, DIA, VOT, and QQQ. Some of the other securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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