Why I Am Buying General Motors At 1-Year Lows (NYSE:GM)

Shares of General Motors (NYSE:GM) slumped to a new 1-year low last Friday after the car brand withdrew its guidance for FY 2023 in the context of continual labor contract negotiations with the United Auto Workers. The strike cost General Motors $200M per week in October and increasing production and earnings uncertainty related to the strike, which was recently escalated to include General Motors’ Tennessee plant, caused the car brand to pull its guidance altogether. I believe investors are overreacting to the guidance situation and I have added to my pile of General Motors’ shares on the drop!

Previous coverage

I rated General Motors a buy in September due to the strength of General Motors’ free cash flow guidance and growing EV product portfolio: An Undervalued Bet On The EV Market. Adoption for electric vehicles is also expected to rise broadly going forward in major countries and the U.S. Department Of Energy’s plan to invest more than $15B in electric vehicle infrastructure in the U.S. was set to lead to long, sustained tailwinds for the industry.

Although General Motors has now withdrew its guidance related to UAW labor strikes, I believe investors are widely overreacting to this short-term event. General Motors’ long-term EV goals and transition to EV technology should not be affected by a short-term bump in costs. For those reasons, I upgrade my rating to strong buy.

General Motors’ earnings come in ahead of expectations

General Motors had a solid Q3’23 with strong adjusted EBIT and the firm’s earnings beat expectations by a good margin as well. Overall, it was a good earnings report, despite the guidance withdrawal for FY 2023 casting clouds over the Q3 release.

Although General Motors withdrew its guidance due to short-term earnings uncertainty, the car brand executed well in the third quarter and saw both volume as well as pricing strength, largely due to robust demand for General Motors’ autos. Both the pickup truck and the sport utility segments are benefiting from strong customer demand and General Motors launched an aggressive campaign to offer its customers a broader range of electric vehicle options, including the Chevrolet Blazer EV for which deliveries began in the third quarter.

General Electric generated $3.6B in adjusted EBIT in the third quarter, which calculates to a solid EBIT margin of 8.1%. While General Motors’ adjusted EBIT was down $0.7B year over year, due largely to volume-mix changes and higher costs, the car brand confirmed that demand for products remained robust throughout the quarter.

General Motors’ longer-term EV goals should therefore not be affected by the withdrawal of the firm’s earnings guidance. General Motors said that it targets a low-to-mid single digit EBIT margin in the electric vehicle segment by 2025 and expects to grow its production footprint aggressively in the medium term. By the end of FY 2025, General Motors expects to be able to roll 1M electric vehicles off of its production belts in North America… which will continue to make General Motors a broad bet on the long-term growth of the EV industry.

General Motors will continue to ramp up its EV production, although likely at a slower pace. Nonetheless, the company is working diligently to broaden its EV appeal by launching new electric vehicles that are meant to drive the company’s delivery growth going forward. In the third quarter, General Motors produced 32 thousand electric vehicles and short-term production interruptions will likely cause this production volume to drop off in Q4’23.

In the longer term, however, the labor strike with the UAW is not going to make a major dent in the company’s earnings, in my opinion. Higher costs resulting from a labor agreement (which was just announced) are likely to get passed on to customers anyway, indicating that the market currently overreacts to the withdrawn guidance for FY 2023.

Strike situation

Ford and Stellantis both have already reached a tentative deal with the United Auto Workers that will see an increase in workers’ pay of 25% plus living cost adjustments and bonuses. In the case of General Motors, however, the United Auto Workers recently expanded its strike to the Tennessee plant which produces Cadillac and GMC sport utility vehicles. A deal was just reached which means GM is also going to bump workers’ pay by 25% over the four-year contract period.

Very low valuation

General Motors is valued at just 4.0X FY 2024 earnings which implies an unreal earnings yield of 25%. General Motors traded at an average P/E ratio of 5.2X which means shares can currently be bought for a 23% discount to the 1-year average P/E ratio. Ford’s (F) earnings potential is also cheap with a P/E ratio of 5.4X as the company also withdrew its guidance, citing earnings uncertainty related to strikes and higher labor costs. Even if General Motors’ shares just revalued to their 1-year average P/E ratio, GM has a massive 30% revaluation potential.

Risks with General Motors

In the short term, the agreement with United Auto Workers will likely shine a light on how expensive the labor deal will be. Ultimately, however, as is the case with Ford and Stellantis, car brands are going to protect their profits and pass on higher costs to consumers. The lack of a clear free cash flow guidance created some uncertainty, but my bet is that General Motors will bounce back from this short-term event quickly… especially as the market turns its focus back on General Motors’ earnings potential going forward.

Final thoughts

I don’t see how General Motors’ long-term risks have significantly increased since September, although I recognize that the withdrawn earnings and free cash flow guidance for FY 2023 has caused considerable uncertainty. But this uncertainty should be limited to the short term as General Motors will continue to execute its EV strategy, launch new electric vehicle products, and ultimately pass on higher labor costs to consumers. General Motors’ long-term EV goals should also not be affected by the tentative labor agreement and shares have 30% revaluation upside once the smoke clears!