Reasons GM Stock Could Double Despite Reaching 52-Week Highs

GM Stock

General Motors (NYSE:GM) stock reached new 52-week highs, marking a 22.5% increase for the year and surpassing the S&P 500 Index ($SPX). This surge contrasts with the performance of Tesla (NASDAQ:TSLA) and other electric vehicle (EV) companies facing challenges, with Tesla being the worst-performing S&P 500 constituent this year.

The divergence between legacy automakers and pure-play EV companies has become evident in recent months. Legacy automakers express optimism regarding earnings and demand prospects, while EV companies report sluggish demand. Tesla warned of lower delivery growth compared to 2023, and EV bankruptcies are anticipated to rise, with Fisker (NYSE:FSR) facing delisting from the NYSE after failed talks with a major automaker.

Despite hitting new highs, GM stock remains undervalued and has the potential to double. GM’s CFO highlighted the company’s low valuation multiple at the Bank of America 2024 Global Auto Summit, emphasizing the divergence between net income and adjusted earnings per share (EPS) guidance. GM anticipates posting net income between $9.8 billion and $11.2 billion in 2024, with adjusted EPS ranging from $8.50 to $9.50, significantly higher than the previous year. This divergence is attributed to a $10 billion share buyback announced last year, expected to increase 2024 EPS by $1.45.

Evaluation metrics indicate GM’s stock is undervalued compared to historical standards. It trades at a lower next 12-month (NTM) price-to-sales multiple and price-to-earnings (PE) multiple compared to long-term averages and rivals like Ford (NYSE:F). Additionally, GM’s NTM market cap to free cash flows is substantially low.

The market’s skepticism towards legacy automakers stems from concerns about peak profitability, particularly as they transition towards electric vehicles. However, GM and Ford CEOs argue they are far from peak profitability. GM aims for EV profitability soon, with plans to pivot production based on demand and introduce hybrid cars in North America to cater to diverse preferences.

Analysts hold a “Moderate Buy” rating for GM stock, with a mean target price of $49.40, implying a 12.2% upside potential. The Street-high target price of $95 suggests the stock could more than double.

While challenges persist, including production issues in EV ramp-up and setbacks in the Cruise self-driving business, GM stands to benefit from a strong pricing and demand environment for internal combustion engine (ICE) cars. With a revised capital allocation strategy focused on increasing shareholder returns, GM could see its valuations normalize and potentially double over the next two to three years.

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