General Motors: An Undervalued Bet on the Electric Vehicle Market (NYSE:GM)

general motors (New York Stock Exchange: General Motors) is an attractive value player in the rapidly growing US electric vehicle market. General Motors is a highly profitable company with a growing lineup of electric vehicles, and it has ambitious goals to increase… The amount of electric vehicles it will produce by fiscal 2025 and strong free cash flow guidance for the current fiscal year. General Motors has guided for a massive expansion in the volume of its electric vehicles in the next two years, and the car brand is valued cheaply on the basis of free cash flow as well as profits. Considering the decline in GM prices since July, I think the risk profile is very favorable for investors to take a position!

Previous evaluation

I rate GM a Strong Buy in September 2021 and the stock It has fallen by more than 30% since then. I recommended GM because of its electrification plans that were beginning to take shape at the time. Since then, GM has debuted new electric vehicles and set more aggressive goals for the EV sector (production and revenue targets as well). I think GM overall offers investors much deeper value now that the product portfolio is denser, new product launches drive revenue, and shares are now much cheaper.

GM is set to rapidly grow electric vehicle sales through fiscal 2025

GM is a serious contender for a leading market share in the global electric vehicle market. Electric vehicle sales are booming, due to generous government incentives around the world and high adoption rates, and legacy automakers like General Motors have gotten the message. GM has set ambitious electric vehicle goals and plans to invest billions of dollars in increasing its electric vehicle production: The auto brand plans to achieve 1 million electric vehicle production volumes in North America and $50 billion in electric vehicle revenue by fiscal year 2025.

Electric vehicle sales are on the rise, not least because the United States is working heavily to stimulate investments in electric vehicle technology and mobility solutions, including building electric vehicle charging infrastructure nationwide. While China remains the largest market for electric vehicles, Europe and the United States are attractive markets for electric vehicle manufacturers, adoption is growing and government spending programs are helping the auto sector transition to mass production of electric vehicles. A concrete example of this is the US Department of Energy’s plan to invest $15.5 billion in the automotive sector to help accelerate the shift towards electric vehicles. The plan includes, for example, $2.0 billion to retool factories in order to allow mass production of electric cars.

According to the International Energy Agency’s “Global Electric Vehicle Outlook 2023”, the global electric vehicle market could see 14 million electric passenger vehicles sold this year, which could show 35% year-on-year growth.

General Motors’ electric vehicle lineup is growing

At a time when electric vehicle sales are on the rise and customers are demanding clean energy/mobility solutions, GM is working to thicken its electric vehicle product portfolio. Just like Ford, GM is investing heavily in electric vehicle production capacity, but it is also launching a growing number of electric vehicle products in the pickup truck and SUV segments. GM, for example, is scheduled to launch a number of products including the Silverado EV pickup truck, the 2024 Chevrolet Blazer EV, and the 2024 Chevrolet Equinox EV. Production of GM’s flagship electric vehicles is scheduled to begin in the second half of this year. .

GM’s revised FCF forecast and rating

GM revised its free cash flow forecasts upward for the second time in fiscal 2023. The auto brand now expects to see adjusted free cash flow of between $7.0 and $9.0 billion due to strong sales and strong pricing power for its existing vehicles, compared to previous forecasts from $5.5-7.5 billion.

Ford (F), for example, guided adjusted free cash flow between $6.5 billion and $7.0 billion. With a market capitalization of $45 billion (for General Motors) and $49 billion (for Ford), GM has a valuation advantage over Ford: its shares trade at 5.7x free cash flow while Ford’s shares are valued at 7.3x free cash flow ( Calculation was based on median FCF guidance issued in Q2 2023 reports).

Based on profits, GM is also cheaper than Ford. GM shares are trading at 4.7X fiscal 2024 earnings while Ford has a forward P/E ratio of 6.5X. From a valuation standpoint, GM seems to be better than Ford.

Risks with GM

Competition in the electric car market is increasing and comes not only from niche players such as Lucid Group (LCID) or Rivian Automotive (RIVN), but increasingly from large-scale legacy car brands such as Ford or Volvo (through its investment in Pole Star). Along with the heightened risks of increased competition (and price pressure), GM faces contract negotiations with the United Auto Workers that could lead to strikes and plant shutdowns… which could jeopardize the company’s fiscal year 2023 guidance. The U.S. economic recession, which some expect to take hold in fiscal 2024, will likely limit GM’s revenue and free cash flow potential next year.

Final thoughts

General Motors is a promising and undervalued investment in the electric vehicle market. The auto brand is investing heavily in expanding its electric vehicle product portfolio, and is set to increase its annual production capacity in North America to 1 million electric vehicles by fiscal 2025. GM has strong free cash flow guidance and significant potential in the electric vehicle market. Due to its large size. With significant free cash flow strength, increasing EV product portfolio, industry tailwinds (growing EV adoption and increasing investments to accelerate the industry’s EV transition) as well as low valuation, I believe the risk profile is favorable for General Motors investors!