Despite macro headwinds plaguing many businesses right now, General Motors (NYSE: GM) appears to be on solid footing. The massive car manufacturer, which houses some well-known brands like Chevy, Cadillac, and its namesake GM, is seeing healthy growth. And management is not only making solid progress on its plans for electrification, they are focused on reducing expenses.
Considering what appears to be solid momentum from the business, should investors buy GM stock, which is up just 15% in 2023? Let's take a closer look at this leading automotive company.
Looking at the latest trends
General Motors reported its 2023 first-quarter results on April 25, and they beat Wall Street expectations on both the top and bottom lines. Revenue jumped 11% to nearly $40 billion, with adjusted diluted earnings per share of $2.21, good for a 6% year-over-year increase. Management was so optimistic about the results that they decided to raise full-year guidance.
A year ago, one of the key factors affecting the auto industry was strained supply chains. But these bottlenecks are starting to ease, which helped GM sell 864,000 wholesale units (excluding the China joint venture). This volume was higher than the 831,000 wholesale units reported in Q1 2022.
GM also benefited from favorable pricing. "We saw a $1.3 billion pricing tailwind year over year in the quarter, driven largely by the price increases in 2022 carrying into 2023," CFO Paul Jacobson highlighted on the Q1 2023 earnings call. Given ongoing macro headwinds, particularly around elevated levels of inflation, it's impressive that GM was able to demonstrate pricing power.
Another potential catalyst for GM's finances should be expense-cutting measures aimed at reducing fixed costs by $2 billion annually. Besides shrinking its employee headcount, GM intends to focus on simplifying its operations, prioritizing certain growth initiatives, and being stricter on discretionary spending. The business expects to realize half of these cost savings this year, ahead of schedule.
NYSE: GM
Key Data Points
The future is autonomous and electric
With the second-best market position in the U.S., GM is a major competitor when it comes to electric vehicles (EV). The company is investing heavily in battery cell production and has new model launches on the horizon. By 2025, the leadership team wants to have the capacity to manufacture 1 million EV units annually.
GM also has thrown its hat into the autonomous vehicle (AV) ring with its 80% stake in Cruise. This division's adjusted operating loss doubled year over year to $600 million. But over time, the goal is for Cruise to register $50 billion in yearly revenue by 2030, which would make it a meaningful contributor to the overall business. By continuing to expand its fleet of robotaxis in new markets, this goal looks possible.
Balancing the valuation and risks
While GM has slightly exceeded the S&P 500's gain in the last three years, the stock has significantly underperformed the broader index over the past five- and 10-year periods. Shares are only up 16% in the past decade, which is definitely not a great track record.
The stock, however, trades at a price-to-book (P/B) multiple below 0.8. This is not only substantially below its average valuation over the past several years, but also much cheaper than Ford's P/B ratio of just over 1.4 right now. Investors might be intrigued by this opportunity.
Nonetheless, there are some important risks to keep in mind. GM is banking on its EV and AV operations to boost expansion, but management only expects the core auto business to grow revenue at about a 5% annualized rate through 2030. That's not anything to get excited about. If those newer initiatives don't pan out as expected, this company will barely be growing faster than the overall U.S. economy. And based on the past, this won't do much to push up the stock price.
Intense competitive factors must also be considered. GM is a leading player in the industry, with popular models that consumers love. But pricing is a huge determinant for buyers, and GM will always have to compete with rivals in this aspect. For what it's worth, the company mentioned that it gained more market share in the U.S. than any other automaker in the latest quarter.
Lastly, investors need to understand that GM is a cyclical business, greatly exposed to the whims of the economic backdrop. Moreover, capital requirements are high and profit margins are low. During the first three months of 2023, GM posted negative adjusted automotive free cash flow of $100 million after not generating anything in this regard in the year-ago period.
I don't view GM as a stock to buy for my portfolio. But investors who accept the risks might believe the business has a bright future. In that case, the cheap valuation looks like a good deal.
