We are raising our price target on General Motors (GM), following our review as the shares have surged through our 49 price target, to the mid-50s. Our lengthy analysis, summarized in the quote below, describes our thinking.
“Lord, Please Make Me Chaste – But Not Yet.”
This quote is from St. Augustine, a highly influential saint in the third and fourth centuries, who also had a few very human traits. In his autobiography, Confessions, he recalled his now-famous quote, noted in the headline above.
As value investors in a remarkably robust (exuberant) stock market, full valuation impels us to want to sell a stock. Such is the case with General Motors. On most conventional metrics, the stock is fairly priced. Through the courtesy of several friends, we’ve seen some of the math that Wall Street analysts use to justify prices well over $100/share and find them laughable, at best. As GM shares burst again through our price target, we were on the razor’s edge of selling.
However, we are also seeing GM undergo a major change – perhaps one of the most impressive turnarounds in American corporate history. Their conventional gas-powered vehicle operations are on an altogether different level than the GM of a decade ago. One needs to look no further than their greatly reduced breakeven volumes, helped no doubt by decisions to exit problem-markets like Europe and Russia, and the step-up in the quality and appeal of GM’s vehicle roster. In an economy juiced by generous government stimulus, low interest rates and tight supplies, we see this business becoming even more profitable.
GM also has laid the groundwork for the future of the transportation industry. While early and murky, we see GM and Tesla creating a form of duopoly in North American electric vehicles. Yes, there are competitors, but we don’t see them as threats that would derail that duopoly, particularly as GM and Tesla extend their leads. FedEx’s deal with GM under the BrightDrop agreement illustrates this momentum.
Another source of potential value for GM (and likely Tesla and perhaps Apple) is the streaming data services that customers might pay for on a monthly basis. Who would have thought, 30 years ago, that we would happily give up free radio and television to pay $150/month for streaming music/videos/ESPN/Disney/Netflix? Similarly, we happily pay $600 for a new phone every few years and $150/month for service to that phone. While it may seem like a stretch today, precedent says we will happily pay $150/month for some kind of data service to our cars. As a value investor, I recognize the much-higher multiple that should be ascribed to those recurring and low-capital-intensity profits.
Our analysis ascribes little value to autonomous vehicles. While thrilling to consider, we view the reality of widespread adoption of AVs to be at least a decade or two away, likely longer. It took the smartphone a decade to make major inroads, and they don’t run over pedestrians or require complicated insurance and legal rules.
Similarly, we put little value on Ultium, GM’s nascent battery business. This will ultimately become a capital-intensive, low-margin business.
GM shares carry risks, of course. Higher gasoline prices, higher corporate income taxes, new mileage regulations, and higher steel and other costs may weigh on revenues and profits. Any disappointments in its current operations, any hiccups along the way to the EV and AV future, along with any lessening of investor sentiment toward the company or the market in general, could sharply reverse the surge in GM shares. As EVs become more widely adopted, sales of gas-powered vehicles will fall, pressing on the fixed-cost profit structure. We also know that competitors won’t cede the market. Volkswagen, Chinese producers, and many others will continue their fight for market share over the coming decades. As we’ve learned from last year, the future is unpredictable, so the market’s current confidence in seeing green lights for the coming months, years and decades may be misplaced.
Some inspiration for not selling GM just yet comes from Howard Marks, the highly-regarded value investor who built and runs Oaktree Capital Management. In his recent memo, available here, he provides some sensible rationale for evolving one’s thinking about technology.
So, we are raising our price target on GM to 62, yet are keeping the shares on a short leash. We “reserve the right to change our mind at any time” and thus move GM shares to a Sell even if they don’t reach 62. But in a surging stock market, and with GM’s remarkable progress in both conventional and new vehicles, let’s not get chaste, just yet.