General Motors: The Best Focus List We Still Love (NYSE: GM)
This article originally published on January 12, 2022.
Our Focus List Stocks: Long Model Portfolio outperformed the S&P 500 by 35% in 2021. This report examines a Focus List long stock that outperformed in 2021 and is positioned to outperform again in 2022. Recently, we highlighted highlights three 2021 underperformers who remain undervalued, which you can read here.
General Motors Co. (GM) outperformed in 2021 and still presents quality risk/reward. We also feature two other Focus List stocks that have outperformed in 2021, HCA Healthcare (HCA) and AutoZone (AZO), in Parts 2 and 3.
Focus list stocks outperformed in 2021
The Focus List Stocks: Long Model Portfolio contains the “best of the best” of our long ideas and leverages superior fundamental datawhich provides a new source of alpha.
Focus List Stocks: Return of the Long Model Portfolio,on average, 58% in 2021 compared to 23% for the S&P 500, according to Figure 1.
Figure 1: Priority List Stocks: Long Model Portfolio Performance for Period Ending 4Q20 to 4Q21
Since our Focus List Stocks: Long Model Portfolio represents the best of the best, not all long ideas make it into the model portfolio. We released 66 long ideas in 2021, but only added six to the Focus Actions: Long Model Portfolio list during the year. Currently, the Focus List Stocks: Long Model Portfolio has 39 stocks.
Figure 2 shows a more detailed breakdown of the model portfolio’s performance, which encompasses all stocks that were in the model portfolio at any time in 2021.
Figure 2: Performance of stocks in the target list Stocks: long model portfolio in 2021
Sources: New Construction, LLC
The performance includes the performance of stocks currently in the Focus Stocks: Long Model Portfolio list, as well as those removed during the year, which is why the number of stocks in Figure 2 (45) is greater than the number in actions currently in the model. Wallet (39).
Outperformance of shares in the priority list: General Motors – Up 41% Vs. S&P 500 up 27% in 2021
We added General Motors to our Focus Stocks: Long Model Portfolio list in June 2018, and the stock outperformed the market by 14% in 2021. General Motors was also one of our top performing picks in 2020. Significant advancements in the company’s electric vehicle (EV), along with an established manufacturing footprint, position the company well for an evolving market.
Main reason for outperformance: EV progress and improved profitability: General Motors is using its large-scale manufacturing capabilities to close the gap with Tesla (NASDAQ: TSLA) first-mover advantage. The company now delivers the Hummer EV Edition 1 pickup truck and BrightDrop EV600 delivery van, which are based on its Ultium EV platform. The company aims to deliver the next Cadillac LYRIQ and aims to have more than 30 electric vehicles in its portfolio by 2025.
Although the company is investing heavily in electric vehicles and technology for future growth opportunities, it remains focused on increasing shareholder value. General Motors’ return on invested capital (ROIC) has fallen from 7% in 2020 to 9% on the TTM.
Why General Motors has more advantages: established manufacturing and distribution: General Motors’ established manufacturing capabilities and expertise, distribution and customer service networks, and proven technological capabilities enable the company to thrive in a changing marketplace. General Motors’ Ultium platform is designed to take advantage of the company’s scale and gives the company the ability to create EV versions of almost any type of vehicle in its portfolio.
While developing transformative technologies and new cars, emerging electric vehicle manufacturers such as Tesla and Rivian (RIVN) have struggled to increase vehicle production capacity while meeting and maintaining high quality standards. As a large, experienced manufacturer, General Motors can more easily scale its EV production by converting existing facilities to EV manufacturing and continuing to invest in the following areas:
- Self-driving technology: Consumer Reports found that General Motors’ Super Cruise is superior to Tesla’s Full Self Driving in detecting distracted driver behavior.
- Battery capacities: The company will build two new battery factories to accelerate battery production capacity.
- software services: Ultifi, the company’s recently announced software platform, will more fully integrate the driving experience into people’s digital lives and add a range of scalable enhancements.
Additionally, General Motors’ future growth opportunities extend beyond electric vehicles as the company seeks to create ecosystems for its customers. For example, BrightDrop, a last-mile commercial delivery logistics solution, provides a portfolio of electric vehicles, smart containers and software to help customers efficiently manage their fleets. FedEx (FDX) and Walmart (WMT) are the first customers of this new offering, with GM delivering its first vehicles to FedEx in December 2021.
The current price implies a 30% drop in General Motors earnings: General Motors’ price to economic book value (EPBV) ratio is 0.7. This ratio implies that the market anticipates a permanent decline in General Motors’ profits of 30%.
We use our inverse discounted cash flow (DCF) model to highlight the disconnection of future earnings growth expectations embedded in General Motors’ current stock price.
To justify General Motors’ current price of $61/share, the market assumes:
- net operating income after tax (NOPAT) margin drops to 6% (equal to its five-year average and compared to 7% TTM) and
- revenues fall by less than 1%, compounded each year over the next decade. For reference, the average consensus estimate expects General Motors revenue to grow 9% annually from 2021 to 2023.
In this scenario, General Motors’ NOPAT in ten years is only $6.8 billion, 18% lower than its five-year average NOPAT and 29% lower than its TTM NOPAT. Discover the calculations behind this reverse DCF scenario.
In this scenario, General Motors’ sales fall by less than 1% compounded annually from 2020 to 2030. Assuming an average selling price of $17,000General Motors vehicle sales increase from 6.8 million in 2020 to 6.2 million in 2030. For reference, with an average sale price of $51,000, Tesla’s current valuation implies that vehicle sales will increase from about 500,000 in 2020 to about 16 million in 2030. Figure 3 compares expected vehicle sales embedded in General Motors’ and Tesla’s stock prices. GM has a very small hurdle to clear before shareholders start to see the upside at the current price.
Figure 3: Implicit Vehicle Sales: General Motors Vs. Tesla
Sources: New Constructs, LLC and company filings
44% increase if the consensus is right: General Motors stock has a significant advantage if we assume that:
- NOPAT margin drops to 6% (equal to its five-year average margin and compared to 7% TTM),
- revenue grows at a CAGR of 9% (equal to consensus CAGR from 2021 to 2023) from 2021 to 2023, and
- revenue increases by only 1% compounded annually from 2024 to 2030, then
The stock is worth $88/share today, up 44% from the current stock price. Discover the calculations behind this reverse DCF scenario. Figure 4 compares General Motors historical NOPAT with the implied NOPAT in each of these scenarios.
Figure 4: Historical and implicit General Motors NOPAT
Sources: New Constructs, LLC and company filings
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation for writing about a specific stock, industry, style, or topic.
 Our research uses our Core Earnings, a more reliable measure of earnings, as evidenced by Core Earnings: New Data & Evidence, authored by professors at Harvard Business School (HBS) and MIT Sloan and published in The Journal of Financial Economics.
 Performance represents the price performance of each stock during the period it was on the Focus Stocks: Long Model Portfolio list in 2021. For stocks removed from the Focus list in 2021, performance is measured from the start of 2021 through the date the ticker was removed from the focus list. For stocks added to the Focus list in 2021, performance is measured from the date the ticker was added to the Focus list through December 31, 2021.
 The performance includes the 1745% rise in GME’s share price during its move to the priority list in 2021.
 In calendar 3Q21 ended by TTM, General Motors sold approximately 6.9 million vehicles and generated $117.6 billion in automotive revenue, or approximately $17,000 per vehicle sold.
 In calendar 3Q21 ended by TTM, Tesla sold approximately 800,000 vehicles and generated $41 billion in automotive revenue, or approximately $51,000 per vehicle sold.