Is General Motors Stock A Buy, Sell, Or Hold After Recent Earnings?

[view original post]

Bill Pugliano/Getty Images News

Elevator Pitch

I have a Hold investment rating for General Motors Company (NYSE:GM). General Motors achieved an earnings beat for the recent quarter, but it didn’t raise full-year 2022 guidance. There is still uncertainty over GM’s 2022 growth prospects, especially relating to the sustainability of high vehicle prices for the rest of the year. Although GM’s future outlook is decent as evidenced by an expected long-term revenue CAGR of close to +10%, the stock’s current valuations are fair as compared to history and peers. This makes General Motors a Hold in my opinion.

Did General Motors Beat Earnings?

General Motors achieved an earnings beat with the company’s Q1 2022 financial results, and this was reflected in GM’s post-earnings stock price performance.

GM announced its financial results for the first quarter of 2022 last week on April 26, 2022 after trading hours. As per the company’s Q1 2022 earnings press release, General Motors’ non-GAAP earnings per share declined by -7% from $2.25 in the first quarter of last year to $2.09 in the most recent quarter. But GM’s Q1 2022 earnings per share came in +26% higher than the sell-side’s consensus bottom line projection of $1.66 per share.

General Motors’ shares rose by +2% from $38.04 as of April 26, 2022 to $38.66 as of April 27, 2022. GM’s stock price increased by a further +6% in the next one week to close at $41.17 as of May 4, 2022. In other words, the market has responded favorably to General Motors’ Q1 2022 earnings with the company’s share price rising by +8% in aggregate since its most recent quarterly results announcement.

GM’s Stock Price Performance In The Past One Month

Seeking Alpha

General Motors’ 2022 Year-to-date Share Price Performance

Seeking Alpha

As per the share price charts above, GM (-4%) has outperformed the S&P 500 (-5%) slightly in the last one month thanks to above-expectations Q1 2022 earnings. However, General Motors’ shares are still down by -30% in 2022 thus far, while the S&P 500 has only corrected by -9% over this period. In the subsequent section, I review General Motors’ Q1 2022 metrics in greater detail so as to understand the reasons for GM’s year-to-date stock price underperformance.

GM Stock Key Metrics

In my opinion, there are certain key metrics which help to explain why GM stock is down in 2022 thus far notwithstanding the recent earnings beat.

Firstly, General Motors’ top line expanded by +11% YoY from $32.5 billion in Q1 2021 to $36.0 billion in Q1 2022, but this fell short of the Wall Street’s consensus revenue forecast of $37.2 billion by -3%. This is likely attributable to the fact that supply chain disruptions have had a negative impact on the company’s production and sales volume to some degree as reflected in weaker-than-expected sales volume for the US business.

Secondly, there are concerns about the sustainability of current vehicles prices which were the key driver of GM’s Q1 earnings beat. General Motors highlighted at the company’s Q1 2022 earnings call that GM Financial’s non-GAAP adjusted earnings before tax rose by +9% YoY due to “strong used vehicle prices.” Separately, General Motors revealed in its most recent 10-Q filing that price increases contributed $1.8 billion of the $3.5 billion YoY increase in revenue for GM North America or GMNA. In a rising interest rate environment with consumer confidence on the wane, slower vehicle demand and lower vehicle prices might be inevitable.

Thirdly, GM’s full-year FY 2022 guidance was disappointing taking into account the company’s Q1 2022 earnings beat, as I will discuss in the next section.

What To Expect After Earnings

General Motors did not raise the company’s FY 2022 guidance despite delivering above-expectations earnings for the first quarter of this year.

General Motors’ Full-Year Fiscal 2022 Guidance

GM’s Q1 2022 Earnings Presentation

Although General Motors raised the company’s FY 2022 EPS guide from $6.25-7.25 to $6.50-7.50, this is a reflection of the favorable change in tax treatment as a result of the company’s increase in its equity stake in Cruise. Apart from that, the other parts of General Motors’ fiscal 2022 guidance remain unchanged. In other words, the Q1 2022 earnings beat didn’t change GM’s view of the company’s operating performance for full-year 2022. This didn’t turn out to be a classic “(earnings) beat and (guidance) raise” that investors were hoping for.

I think that there are two factors that prevented General Motors from issuing a more bullish guidance for FY 2022. One factor is pricing. As I discussed in the preceding section, strong vehicle pricing which boosted GM’s Q1 financial performance might not be sustained for the full year. Another factor is the company’s continued investments to drive long-term growth. At the company’s earlier Q4 2021 results briefing on February 1, 2022, GM guided for “another $1.5 billion in expenses (in 2022) to expand software development and further accelerate our EV portfolio.”

In summary, it was a disappointment that General Motors left its management guidance for this change largely unchanged, even though the company’s actual Q1 2022 earnings beat market expectations by a wide margin. This is a reflection of the management’s cautious views about the company’s near-term prospects in 2022.

What Is General Motors’s Long-Term Outlook?

General Motors’ long-term outlook is good, notwithstanding near-term challenges as evidenced by the company’s decision to largely maintain its FY 2022 guidance.

As per the company’s Q1 2022 results presentation, GM has set a goal of growing its revenue from $127 billion in FY 2021 to $295 billion by FY 2030 (midpoint of $275-315 billion top line guidance), implying a revenue CAGR of +9.8%. This is close to General Motors’ sell-side consensus FY 2022-2025 top line CAGR of +9.2% as per S&P Capital IQ data. This implies that analysts have confidence in GM’s ability to achieve its long-term revenue growth target.

However, the market consensus sees General Motors expanding its earnings per share by a much lower CAGR of +1.9% for the FY 2022-2025 period. This is because GM needs to invest significantly to pivot towards electric vehicles or EVs so as to deliver strong top line growth in the years ahead. As highlighted at its Q1 2022 earnings briefing, General Motors has plans to increase its EV production capacity in North America to over one million units by 2025, and this will move GM closer to its goal of having EVs contributing approximately 30% of its revenue in 2030.

In a nutshell, GM’s expected revenue CAGR of +9.2% in the next five years is decent thanks to the expansion of its EV business. But it will take a longer time for General Motors to scale up its EV operations, before eventually translating its revenue growth into margin expansion. The company targets to improve its adjusted EBIT margin from 7.9% in FY 2020 to 12%-14% in FY 2030.

Is General Motors Stock At A Fair Valuation?

I see that General Motors stock is at a fair valuation.

From a historical perspective, GM is currently trading at 6.1 times consensus forward next twelve months’ EV/EBITDA as per S&P Capital IQ, which is only +9% higher than its 10-year mean forward EV/EBITDA ratio of 5.6 times.

In terms of peer comparison, General Motors’ consensus forward next twelve months’ normalized P/E multiple of 6.1 times is around -11% below Ford Motor Company’s (F) forward P/E ratio of 6.9 times.

As such, it is hard to argue that GM is either undervalued or overvalued to a large degree, based on an assessment of the stock’s historical and peer valuations.

Is GM Stock A Buy, Sell, or Hold?

GM is a Hold. GM’s valuations appear to be fair after a comparison with its historical averages and its closest peer, Ford. Although lower vehicle pricing and an increase in investments could be a drag on the company’s FY 2022 financial performance, I am positive on General Motors’ long-term outlook. Taking into account these factors, I rate General Motors as a Hold.