General Motors' (NYSE:GM) top executives want you to know something: They think GM stock is a strong buy. Lately, they've stepped up their efforts to make the case to Wall Street -- and to individual investors.
This isn't entirely new. Not long after Mary Barra took over as GM's CEO in 2014, the company took to opening its earnings presentations and analyst briefings with a slide titled, "GM is a Compelling Investment Opportunity."
However, in the last couple of months, they've made it more emphatic. Here's the revised slide, as it appeared in a presentation given to Wall Street analysts by CFO Chuck Stevens in August.
As you can see, the case for GM as an investment -- as GM itself sees it -- has four parts. Let's look at each, as Stevens presented them.
With the U.S. new-car market stalled and possibly heading for a cyclical decline, the idea that GM (or any automaker heavily dependent on the U.S. market) is headed for earnings growth seems like a hard sell.
But Stevens argued that GM is doing better than many investors realize. If you exclude the results from GM's money-losing European subsidiary, which it sold earlier this year, GM's revenue, pre-tax profit, and free cash flow all grew in the first half of 2017 from the same period a year ago. (Contrast that with rival Ford Motor Company (NYSE:F), which has seen its pre-tax profits decline on increased costs this year.)
That's just one period, but the point Stevens wanted to make is that GM's profit is currently growing faster than its revenue, thanks to its ability to get good pricing on strong new products in popular market segments (like its new line of crossover SUVs). With more new products on the way in still-strong truck and SUV market segments, GM thinks it can sustain that strong pricing even as the overall new-car market weakens.
On the other side of the ledger, GM's ongoing effort to reduce costs by taking better advantage of its vast global scale is having more success than Stevens and Barra had originally expected. GM now expects its annual costs to be $6.5 billion lower in 2018 than they were in 2014. That number may increase between now and the end of next year, he said.
Disciplined capital allocation
Barra and Stevens often talk about GM's "disciplined capital allocation framework," the guidelines they use for directing the company's capital. I covered it in much more detail here, but the important thing to know is that there are four key parts to the framework:
- GM seeks to generate returns on its invested capital (ROIC) of greater than 20%.
- GM is committed to mainlining a cash balance of about $18 billion, to ensure that it can continue to invest in future products and technologies during an economic downturn.
- GM is committed to maintaining an investment-grade credit rating, so that it will have access to capital at reasonable rates when opportunities or challenges arise.
- GM will consistently return excess cash to its shareholders via dividends or share buybacks.
A note about that last point: GM pays a steady dividend that it intends to maintain through a recession (unless it runs out of cash and has to tap its credit lines, which is unlikely unless the recession is very severe or protracted -- more details on that below). When it has excess cash over and above what it needs to pay the dividend, it uses that cash to reduce its total number of shares outstanding. (The idea is that with fewer shares outstanding, each of the remaining shares should be worth more.)
Robust downside protection
Stevens had two messages for investors regarding this:
- GM's leadership is very aware that they're in a cyclical business, and that the current cycle is probably past its peak -- and they're managing the business accordingly.
- GM modeled the effects of a "moderate" downturn, which it defined as a 25% decline in U.S. sales.
I wrote about the effects of that modeled downturn in more detail here. Here's the summary: Under the "moderate" scenario, GM's profits and cash flow would shrink substantially, as you'd expect. But it would still be profitable, it would be able to continue its investments in future products and new technologies at current levels, and it would continue paying its dividend to shareholders, all without drawing on its line of credit.
Long story short: Unless the downturn is extraordinarily severe and protracted, GM will get through it without trouble, will keep paying its dividend, and will emerge in a strong competitive position with new products when buyers start returning to showrooms.
Technology and innovation
The big message for investors here is that GM is determined to "disrupt" itself before anyone else does. That might sound like the usual corporate blather, but -- more so than most automakers -- GM has been walking that talk, and doing so for a while:
- Electric cars: GM's Chevrolet Bolt EV was the first mass-market electric car with over 200 miles of range, beating Tesla to market by over six months.
- Autonomous driving: GM subsidiary Cruise Automation is regarded as one of the leaders in the rush to create market-ready Level 4 self-driving vehicles.
- Car-sharing and ride-hailing: GM owns 9% of Lyft and 100% of fast-growing urban car-sharing company Maven -- and both Maven and Cruise appear to be exploring the idea of creating ride-hailing businesses.
- Connectivity: GM's OnStar system has been providing basic cellular-based vehicle connectivity for many years. With more than 12 million OnStar-capable vehicles now on the road, GM is investing in OnStar's infrastructure to create a more robust, future-minded system.
Long story short: Some automakers won't survive the transition to self-driving cars, electric drivetrains, and new flexible, app-driven models of "mobility." But the message from GM's leadership is this: GM has already demonstrated that it's more prepared than most of its rivals to thrive and profit as technology transforms its business, and it will continue its push to be among the leaders in each of these spaces.
The upshot: GM's case for GM is more than just talk
To sum up: GM's view is that its moves over the last year (the launch of the Bolt, the sale of Opel, its fleet of all-new crossovers) make it an even more compelling investment than it had been during the early part of Barra's tenure as CEO, even if a downturn is looming.
Are they right? There are good reasons to be wary of investing in a cyclical industrial business late in its cycle. (For starters, you might get it cheaper if you wait.) But there's a case to buy GM now, too: It is in a very strong competitive position relative to its peers, it's in a great position to grow and thrive during the next cycle -- and that dividend can be reinvested through the downturn to increase your stake.
Is that a winning argument? The decision is yours, but from where I sit, GM's case looks pretty solid.