General Motors (NYSE:GM) has proven why it is one of the world’s leading automakers given its advanced material supply agreements, impressive projected output of 160GW from Ultium battery plants and exemplary capital Raises/loans so far.
With EV investments accelerating, we are very confident in GM’s projected capacity of 1 million by 2025, if not sooner, assuming eventual macroeconomic and global supply chain recovery by 2024. Along with an aggressive projected YoY 30% wholesale growth and $90B annual EV revenue by 2030, GM is indeed absolutely ready to go. As icing on the cake, 75% of its raw materials are also sourced from North America due to the significant geopolitical impact of Russia and China.
The temporarily increased sticker price on new and used car sales would also improve GM’s margin given the limited market supply over the next few quarters. This speculatively offsets the impact of rising inflation to the tune of $5 billion in fiscal 2022 and aggressive investments in the EV segment through 2025.
GM continues to face temporary headwinds in chip supply
In Q2 2022, GM reported revenue of $35.76 billion and gross margins of 12.5%, up 4.6% at a decrease of -2.3 percentage points year-on-year, partly reflecting the rising inflation and global chip supply. The company also reported further headwinds for its profitability with net income of $1.69 billion and a net income margin of 4.7%, indicating a decline of -40.4% or -3.6 percentage points year-on-year.
However, it is important to note that these declines are primarily due to the 95,000 vehicles, valued at approximately $5.7 billion (based on average transaction prices of $60,000 for trucks and SUVs) that were produced in North America and due to a lack components were not delivered. This shifts unrecognized earnings, net income and free cash flow (FCF) generation to H2’22.
This global event has had a direct impact on GM’s cash flow generation, with FCF of $1.66 billion and a FCF margin of 4.65% in Q2 2022, down -72.5% and -4.5% respectively -13.06 percentage points year-on-year. Increased capital expenditures of $2.1 billion in the most recent quarter also contributed in part to its lower cash flow, compared to $1.5 billion in the second quarter of 2021.
As a result, it’s not surprising to see a cash and cash equivalents impact on its balance sheet of $19.72 billion in the most recent quarter, compared to $27.37 billion in the second quarter of 2021. However, we must also highlight, that total remains robust for most of its $35 billion EV expansion and growth plans through 2025 given its robust adjustment. FY2021 FCF of $7.68B and forecast adj. FY2022 FCF of up to $9 billion.
These rapid expansion plans have directly contributed to the growth of GM’s net PPE assets to $41.8 billion, a 7.6% year-over-year increase, with a continued investment of $5.38 billion in capital expenditures throughout the year Q2 2022 (of which $2.1 billion for real estate).
Meanwhile, the company’s long-term debt of $16.12 billion and interest expense of $0.23 billion remain relatively stable in the most recent quarter, significantly helped by the new $1 billion notes due 2029, 1.25-billion the US Department of Energy’s post-Q2 2022 results announcement. Barring additional debt financing, these capital increases would bring the company’s debt to $20.87 billion in Q3-22 and its balance sheet at a time economic uncertainties. GM CEO Mary Barra said:
While demand remains strong, there are certainly growing concerns about the economy. As such, we are already taking proactive steps to manage costs and cash flows, including reducing some discretionary spend and limiting hiring to critical needs and positions that support growth. … We have a foundation of strong earnings and cash flows, an investment grade credit rating, historically low pension liabilities, and superior vehicles, service and prices. … All of this will help us to continue executing our growth strategy and protect it from near-term market challenges. (search alpha)
Mr. Market has confidently improved GM’s profitability
Over the next five years, GM is expected to report revenue and net income growth at a CAGR of 7.78% and -1.34%, respectively. While the top-line numbers represent a notable -4.2% drop in estimates since our previous analysis in July 2022, we also have to highlight the impressive 7.8% increase in projected profitability through 2026. With that, we point to the improved net profit margins of 5.1% in fiscal 2026, similar to the level of 4.9% in fiscal 2019.
For fiscal 2022, the consensus estimates that GM will report revenue of $154.02 billion, net income of $10.15 billion, and net profit margins of 6.5%, which represented outstanding growth of 21.2%, respectively significantly strengthened by management’s reconfirmed guidance in its recent second quarter 2022 earnings call.
In the meantime, we encourage you to read our previous article on GM, which would help you better understand its position and market opportunity.
- General Motors catches up with Tesla (TSLA).
So is GM stock a buy?Sell or hold?
GM 5Y EV/Sales and P/E ratings
GM currently trades at 0.93x EV/NTM revenue and 5.52x NTM P/E, down from its 5-year median of 1.05x and 7.91x, respectively. The stock is also trading at $38.47, down -42.7% from its 52-week high of $67.21, albeit at a 26.8% premium from its 52-week low from $30.33.
GM 5Y stock price
It’s evident that GM is riding the post-Inflation Reduction Act optimistic sentiment combined with the reinstatement of its quarterly dividends, a $5 billion share buyback program and its strengthened domestic battery supply chain with LG Chem, POSCO Chemical and Livent Corporation (LHM ). The latter would definitely support the company’s future sales given the favorable $7.5k tax credit for its base models of trucks, vans and SUVs
The recent semi-destruction of mid-tier smartphones and PCs could also pave the way for increased production and availability of automotive chips from GM’s domestic partners like Qualcomm (NASDAQ:QCOM) and ON Semiconductor (NASDAQ:ON) through H2’22. This can potentially increase the company’s delivery and revenue growth. Assuming a production output of 1 billion by 2025, the EV segment would easily account for 15% of its global shipments of 6.29 million from FY2021 onwards. Otherwise a decent 10% based on GM’s peak output of 10.01M in 2016.
Nonetheless, on the back of Powell’s aggressive comment on aggressive rate hikes, consensus estimates have downgraded GM’s stock price target from $53.17 in July 2022 to $45.43 at the time of writing, the latter a marginal gain of 18.09% over the current courses. Combined with the fact that it is trading with a baked-in premium above its 50-day moving average of $35.84, we prefer to remain cautious for now. We may see a more attractive entry point at the upcoming Sept. 20 Fed meeting, so interested investors would be wise to await this decline before jumping in mid-$30.
Good luck to all.