Berkshire Hathaway’s (BRK.B) Q2 13F filing - released earlier this week - revealed that the conglomerate, led by legendary value investor Warren Buffett, was a net seller of stocks for the second consecutive quarter. Among others, Berkshire trimmed its holdings in automotive giant General Motors (GM) by 45%.
But while Buffett's firm might be selling GM in 2023 – and unloaded 10 million shares in 2022, as well – I believe the stock looks like a reasonably good buy at these price levels.
This year hasn't been a good one for legacy automotive stocks, even as pure-play electric vehicle (EV) names have performed well. General Motors stock, for instance, is trading near 52-week lows, and is down 1.7% for the year. Its price action is trailing the S&P 500 ($SPX) - which, despite the recent pullback, is still up almost 14% for the year. Rival Ford (F) hasn’t done much better, up just 2.7% in 2023.
Why Has General Motors Stock Been Falling?
There are multiple reasons behind the weakness in GM this year. First, U.S. markets have been polarized, and tech stocks have driven the rally while some other sectors - like energy, financials, healthcare, and industrials - have lagged.
Concerns over a macroeconomic slowdown and possible recession are also weighing heavy on investors’ minds. The automotive industry tends to underperform in a recessionary environment, as people delay big-ticket purchases like cars.
There is also uncertainty over automakers’ negotiations with the United Auto Workers (UAW) union, which is considering a strike if its demands are not met. GM's healthy earnings heading into the UAW talks are among the reasons the union has been so stringent in its demands, including a 40% pay hike for workers.
Meanwhile, markets are worried that the profitability of legacy automakers like Ford and General Motors is at its peak now, and will fall in the coming years. The EV price war is not helping matters, as there are concerns that it could weigh on margins in the coming quarters.
Meanwhile, despite the multiple headwinds facing General Motors, I find the stock a reasonably good buy at these price levels.
GM Looks Like a Good Buy: Here’s Why
General Motors' financial performance has been quite strong in recent quarters. The automaker not only posted better-than-expected Q2 earnings, GM also raised its full-year adjusted pre-tax profit guidance by $1 billion, and now expects the number to be between $12 billion and $14 billion.
GM raised its full-year automotive free cash flow guidance to $7 billion-$9 billion and expects to post earnings per share between $7.15-$8.15 in the year. Even the lower end of the guidance implies a 2023 price-to-earnings multiple of 4.6x. While there are concerns over peak profitability and the UAW contract talks, I believe the current multiples are pricing in all these negatives.
Plus, General Motors has also expanded its cost-cut measures and now expects to lower costs by $3 billion – which is $1 billion beyond its previous guidance.
General Motors met its guidance of producing 50,000 EVs in North America in the first half, and aims to produce 100,000 vehicles in the second half of the year. It is also standing by the original guidance of reaching EV profitability by 2025. The company has set a goal of hitting 1 million EV production capacity by 2025. Ford was previously targeting an EV production capacity of 2 million by 2026, but has now said it will be “flexible” with the timing – while extending the goal of reaching a capacity of 600,000 EVs from 2023 to 2024.
Cruise Could be an Underappreciated Asset
GM also holds the majority stake in Cruise, its autonomous driving business. Responding to an analyst question on whether General Motors would also consider licensing the Ultra Cruise driving system to others, CEO Mary Barra said during the Q2 earnings call that she sees the product as both “revenue-generating and profit-generating” – while keeping more details for the company’s investor day event in the fall.
I believe that along with strong automotive operations and the EV pivot, GM's autonomous driving business will also drive long-term value for investors, even as the asset is currently being underappreciated by the markets.
GM Forecast Looks Bullish
Overall, Wall Street analysts rate GM as a Moderate Buy:
Of the 17 analysts that cover General Motors stock, 7 have a Strong Buy rating and 2 more have a Moderate Buy rating. Seven analysts rate the stock as a Hold, while the remaining 1 analyst has a Strong Sell rating. Its mean target price of $51.44 implies upside potential of a whopping 56% over current prices.
Recently, the valuation of Vietnam-based EV company VinFast (VFS) surpassed that of General Motors. While VinFast’s valuation has since come down - and rightly so - it is nonetheless a reflection of just how undervalued legacy automakers like GM currently are.
While Berkshire Hathaway might have had its own reasons to sell General Motors shares (Buffett has even scaled back repurchases of Berkshire Hathaway shares), I believe GM stock looks like a decent buy at these price levels, considering the tepid valuations which provide a good margin of safety.
On the date of publication, Mohit Oberoi had a position in: F , GM , BRK.B . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
