Description

General Motors — JUNE 2025 $60 CALL

We believe that GM is a significantly mispriced stock and a fundamentally misunderstood business, the reality of which will become clear with the fullness of time. We believe GM stock offers a 2.7x return, and the LEAP options offer 20x…

By our reasonable estimates, GM is presently trading at about 3.5x our guess of 2025 EPS. We estimate that the earnings power of GM in a normal environment in 2-3 years should be ~$10.50, and that GM deserves to trade at 10x earnings for a valuation of $100, or 2.5x+ the present price. Importantly, for those shopping for more horse-power the LEAP option calls on the stock are very interesting, with the June 2025 $60’s implying that one’s return (if the shares trade to our target price) should be over 20x…  Presently, the "furthest out" one could go is mid-2025, and the highest strike is $60. Aside from the capitalizing on the equity, we believe a key opportunity for GM is in options, which are low-priced because the company is understandably not presently being underwritten for the kind of price-action we are hoping for (a near-triple) over the next ~2 years.

In short, we believe the fundamental features of the GM story are as follows:

1.  Overall, the auto business is a poor business, except for specific pockets of the industry. GM is an oligopoly player in one of these highly profitable markets, selling body-on-frame pickups and large SUVs in North America (Silverado, Escalade, Tahoe, Suburban, GMC, etc.), which produce ~17% overall EBIT margins. The business has the following positive features;
   1.  An oligopoly with historical discipline and a present environment where the key players must milk the ICE cash-cow to fund EVs, 
   2.  High brand loyalty and a very valuable and resilient brand name,
   3.  Government is on GM’s side with plenty of political protectionism given UAW, the Chicken Tax, etc.,
   4.  A possible boost from public infrastructure spending (contractors need pickups), a tailwind which may be countercyclical, 
   5.  A segment which will be the last to switch to EVs, for political, cultural, and very practical reasons.
      
      
2.  We consider the rest of GM auto (GMI, China, non-truck/SUV in NA, etc.) as “barely profitable”. GM does not sell in Europe (except for special imports).
   
   
3.  On EVs overall, we believe they are generally “bad for business”. The OEMs are required to commit to large amounts of capex to stay in the game, with EVs becoming table-stakes for OEMs. 
   
   But, we believe that EVs may be an opportunity for GM, which is over-indexed in middle America (pickups and large SUVs) and under-indexed on coasts. Further, Toyota and friends (Subaru / Mazda), which have 20% share, seem to be very behind on EVs. We would not be surprised if the Americans gain significant market share over this decade with the advent of EVs…
    
4.  On EVs for GM, we are neutral as shareholders. The company hopes to produce at a run rate of 1.0m EVs in 2025 and achieve a low-to-mid-single-digit margin, all which does not seem unreasonable. The low-margin EVs will likely cannibalize low-margin ICE (crossovers and small cars), so we do not imagine EPS will be impacted during the transition. GM has said they will maintain 8-10% EBIT margins in North America during the “switch”.Overall, the EV execution is a primary overhang on GM’s share price. We are unsure of what the “EV downside” is exactly, but Wall Street may believe that GM a) has a poor EV lineup, b) cannot produce EVs, or c) the EVs will be profit dilutive. We are much less concerned... GM seems to have attractive EVs beginning to roll off the line, has large production capacity which will ramp over the next few quarters, and its EVs should reasonably achieve some profitability on their own (and margin parity with ICE thanks to large IRA credits). We hope the stock will react positively as GM ramps EV production over the course of the year, and these clouds of worry dissipate.
   
   (Re: the IRA, GM will receive a very large OEM credit of $2,500 –$3,500 per car. We believe this is highly underappreciated and missed by the Street. A $3,000 check from the US government amounts to a very large ~750bp boost to margins. GM’s estimate for L-MSD % EV margins does not include the IRA, so EVs should be at margin parity with ICE come 2025 with the credits.)
   
   
5.  GM owns 80% of Cruise, which was valued at $30bn in 2021. Cruise is widely regarded as the #1 or #2 in AVs, presently making $100m run-rate revenues from autonomous ride-share in SF, Austin, and Phoenix. We are not AV/AI analysts, but Cruise is an interesting opportunity. At the 2021 mark, it is worth $17/share for GM (so, is GM Auto then trading at 1.9x EPS?). And, if GM is right and Cruise can generate $50bn of revenues and one values it at 1.5x, that is approximately $46/share of value for GM. We are not seriously underwriting Cruise, but consider it a possible positive surprise and source of sex-appeal for GM stock. Ford recently closed its autonomous unit, and no other automaker seems to come close to Cruise on AVs (including Tesla). 

6.  We believe that GM’s management team is high quality. Mary Barra has done all the right things, leading a key push into EVs since 2015, placing GM as second to Tesla in volumes, technology, and product. Barra also improved product reliability, created internal efficiencies, changed company culture, got out of Europe etc. while Paul Jacobson, CFO since 2020 and previously CFO at Delta, is shareholder oriented and efficiencies-driven. At Delta, Paul reduced the share count by 25% during his tenure and he has been aggressively repurchasing GM stock since the third quarter of last year. 
   
   
7.  GM’s tangible book value is $46.36, thus the shares are trading at 0.8x TBV.

8.  GM’s balance sheet is very strong, with $21.4bn of cash and $16.4bn of debt as of Q1’23 (ex-GMF). Further, GM may see a very material cash inflow from a working capital wind (they are still producing below normal due to supply chain). We believe that GM will use the cash to buy back stock aggressively, which are highly accretive at this multiple, and especially below book. 

9.  The company has been promotional of its other projects, including the EV van business, software, GM Defense, etc. We exclude all of this from the analysis.
   
   
10.  Simply, the company’s earnings power of ~$10.50 in 2025 passes a cursory “sanity test”. Between 2015 and 2022, the company’s average EPS was $6.60 (or, $6.84 excluding the 2019 UAW strike, and about $7.30 excluding losses from Cruise). The ~50% growth of EPS from $6.84 to $10.50 over a seven year period results in only a ~6% CAGR, which does not seem unreasonable to us.
    
    
11.  Importantly, our ~$10.50 x 10 P/E = ~$100 assumes “business as normal” and does not underwrite major success for GM in EVs, Cruise, or other projects.

Valuation

We arrive at our number of ~$10.50, as follows:

1.  GM makes about 17.5% margins on its 1.4m units of NA pick-up trucks and large SUVs, which amounts to about $11.8bn.
2.  The other 1.6m cars in NA (commodity vehicles) make 1% margin, or $0.6bn.
3.  The IRA brings in roughly $2.3bn (830,000 EVs in USA x $35/KWH x 80 KWH/EV).
4.  “Normal” earnings from GM Financial are about $2.5bn.
5.  The China and international businesses contribute $0.5bn.
6.  GM Auto is presently interest payment neutral.
7.  We subtract 28% for taxes.
8.  On 1.31bn shares outstanding, the EPS is ~$10.20. 
9.  We value GM’s core business at 10x earnings, so roughly $100 per share.
10.  Further, one should assign a value to Cruise. We are not AV analysts, but we will be able to taste the proof in the pudding come 2025. So, if Cruise is worth its 2021 mark or if it becomes a total success, its value could be $30bn to $100bn, or $18 to $61 per share, respectively. If Cruise is a worthless science project, we are still purchasing GM shares at a steep discount of 3.5x EPS. 
11.  Thus, GM is worth approximately $100 per share without Cruise and $118 to $161 with Cruise in 2025. The stock is presently $37, so we are happy shareholders. 

DISCLAIMER: This is intended for information purposes only (not investment advice) and should not be relied upon solely as a basis for investment. The author may hold a position in the issuer and undertakes no obligation to update any future changes in the position or in the investment opinions expressed herein.

Catalyst

Fundamentally good quality business trading at an "existential-threat multiple" which will wash away in due time, and with the potential for a number very large positive surprises.