Description

Opportunity

General Motors (“GM”) appears as an attractive opportunity as the market is not recognizing the significant upside opportunities of its investments in EVs and Autonomous driving. GM is trading at $33.65 and has a market cap of $49bn and is expected to deliver in 2022 $6.75-7.25Adj EPS, $13.5-14.5bn of EBIT and $10-11bn of adjusted automotive free cash flow. 

I will focus on a sum of the parts analysis to showcase the potential value creation if some of the growth investments deliver on expectations.

GM Business Units

GM is composed of 4 Main Business Unites: GM North America Automotive, (GMNA), GM International Automotive (GMI), GM Financial (GMF) and Cruise its autonomous driving business. 

GM North America Automotive

GM North America Automotive combines its highly profitable and cash generating ICE trucks business with its developing electric vehicle segment, where GM has been investing most of its new capex and resources for the last few years.

The ICE Truck business is a mature and profitable business that is enabling GM to deliver ~$14bn of EBIT and $10-11bn of free cash flow for 2022, in a market that is below average at ~14mm SAAR vs the ~17mm pre-Covid SAAR from 2015 to 2019.

GM is utilizing the cash flow generation to invest in its electric vehicle platform and manufacturing capacity with the objective to reach 1mm NA EV unit sales and $50bn of revenues in 2025. 

The capex investments to achieve this objective are significant and increasing from $9-10bn in 2022 to a guidance of $11-13bn going forward. These investments will be a significant headwind to cash generation in the coming years, but should enable GM to achieve double digit sales growth, while maintaining GMNA EBIT margins between 8-10%.

To simulate different scenarios, I will showcase a base and downside scenario for the sum of the parts valuation analysis

GM International

GM international is composed of GM LatAm and Asia business, including its China join venture. Historically this division has been barely profitable, with the exception of the China JV. For the sum of the parts I will only assign value to the JV equity value at 1.0x book value, with 4% (downside) and 8% (base) growth scenarios.

GM Financial

GM Financial is a captive auto lending business which has grown significantly to $15.6bn of equity and has delivered ROEs north of 20% for the last few years. This business outperformance should subside in 2023 and forward as used car prices are decreasing and this should normalize delinquencies, net charge offs and ultimately profitability. For the sum of the parts analysis, I utilized growth of 0% and ROE of 10% (downside) and growth of 5% and ROE of 15% (Base). I used 1.0x Book Value as a conservative estimate of the terminal value of the business.

Cruise

Cruise is the autonomous driving unit that has been able to test driverless paid rides to customers in San Francisco, Austin and Phoenix. Cruise is leading this technological race, with Waymo (Alphabet) as the only other competitor currently offering paid driverless rides to customers. GM owns north of 80% of Cruise and is expecting to contribute ~$2bn per year to continue to fund its operations. For the sum of the parts valuation, I use $0 (downside) and $24bn or 80% of the latest $30bn fundraising valuation (base case)

Net Debt

GM has significantly reduced its automotive Net Debt position, adjusted for its pension and other retirement liabilities which currently stands at $8.4bn.

Sum of the Parts Analysis – Base Case Scenario – 234% 3yr Return

In my base case sum of the parts analysis I utilize the 12% GMNA CAGR (investor day guidance), 9% GMNA EBIT margin (investor day midpoint guidance), Capex at $12bn (investor day midpoint guidance ) GMNA Terminal value at 10x multiple of free cash flow and no GMNA cash taxes, as the company utilizes its $19.8bn of deferred tax assets. Also assume that net interest income is zero as $23bn of cash and securities cover $19bn of Debt and that depreciation and pension and OPEB expenses stay constant at 2022 levels.

Sum of the Parts Analysis – Downside Case Scenario – 37% 3 Yr Return

In my downside case sum of the parts analysis I utilize the 5% GMNA CAGR, 8% GMNA EBIT margin (investor day lowpoint guidance),  Capex at $1bn (investor day lowpoint guidance ) GMNA Terminal value at 6x multiple of free cash flow and no GMNA cash taxes. Also assume no value for Cruise.

Summary

The sum of the parts analysis would suggest that the market is significantly discounting GM investor day guidance, which if delivered could enable significant value creation, more than tripling the stock price over 3 years. 

The CEO Mary Barra has in my opinion demonstrated good management and capital allocation skills, closing unprofitable subs, reducing net debt and delivering profitability and cash flow under very different market conditions. Whether she can capitalize on her investments in cruise and EVs is still to be confirmed, but the risk reward appears favorable.

Main risks

• GM Electrification guidance can’t be achieved, with significant waste of capex and resources

• Cruise autonomous driving never reaches commercial success

• Economic crisis, labor and market headwinds significantly reducing automotive sales and margins below 8%

• Severe used car prices reduction impacting net charge offs and profitability for GM financial

Catalysts

• Continuous progress on EVs sales and production capacity development trending towards 10%+ margin range

• Accelerated growth of additional EV business including Brightdrop, GM Defense, services, etc

• Cruise reaches successful commercial scale and monetization

Catalyst

Catalysts

• Continuous progress on EVs sales and production capacity development trending towards 10%+ margin range

• Accelerated growth of additional EV business including Brightdrop, GM Defense, services, etc

• Cruise reaches successful commercial scale and monetization