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Bull of the Day: General Motors (GM)

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You’d be hard-pressed to find a company as quintessentially American as General Motors (GM - Free Report) .

Founded in 1908 by former horse-drawn carriage maker William Durant as a holding company with the intention of acquiring nascent automobile manufacturers, GM grew to be the world’s largest automaker by 1931 – a title the company held for more than 75 years. At its peak, the company enjoyed market share of over 50% in the US.

Though the number of brands under the GM umbrella has changed frequently over the years and has been consolidated to include only four makes in the US, its highest-end brand has become synonymous with high quality or luxury. How many times have you heard someone refer to the best example of something that has noting to do with automobiles as, “the Cadillac of…”?

Starting in the 1970s, GM encountered much more difficult conditions with tough fuel economy and pollution regulations, high US labor costs and competition from foreign automakers. Product quality suffered, though a loyal audience continued to buy GM autos.

You probably already know that the GM of the past century is not the same entity as the current corporation – though they do share the name. The original company declared Chapter 11 bankruptcy during the financial crisis of 2008-09 and was rescued with an equity purchase by the Troubled Asset Relief Program (TARP) which saved over a million US jobs, primarily in manufacturing – both at GM itself as well as at its many suppliers.

Equity shareholders in the old company found that their stakes were worthless after creditors were paid, but a new public company rose from the ashes in 2010. The US Government closed their position as an owner of GM in 2013 at a small loss. (That loss was unusual. Most TARP assets were eventually sold profitably, though the separate sale of GM’s former finance arm did produce a profit and the preservation of GM’s outsized tax revenues made the bailout a good deal for taxpayers.)

Unfortunately, since selling shares to the public at $33 in the 2010 IPO, GM is up only about 27%. Over the same period, the S&P 500 is up over 200% - and even more when dividends are factored in. (GM does not currently pay a cash dividend.)

It looks like things are about to change.

Electric vehicle manufacturer Tesla (TSLA - Free Report) has become the most valuable car company in the world – by a very wide margin – by offering a popular and diverse line of electric cars, outselling all other manufacturers combined and planning for the future by manufacturing their own battery pack.

The efficiency of the batteries and the cost to produce (or buy) them is the single most important factor in the feasibility and profitability of electric vehicles. The rest of the car is very similar to conventional internal combustion-engined cars. (In many respects, it can actually be simpler than traditional cars.)

Until now, GM only had one fully electric model  - the Bolt – and it’s believed the company was losing as much as $5,000 on each of the economy-sized vehicles they sold. Over the next three years, they’ll be rolling out more than 20 fully- electric cars in the US as well as in China and that lineup will include high-end luxury cars and SUVs. We won’t know until after at least a few quarters of sales, but it’s likely that those luxury vehicles will sell at prices that provide comfortable gross margins.

GM has developed its own modular battery platform that CEO Mary Barra says will allow the company to create, “a multi-brand, multi-segment EV strategy with economies of scale that rivals our full-size truck business with much less complexity and even more flexibility.”

Analysts are warming up to the idea that GM is putting together the pieces to be a successful EV company even as they continue to enjoy success in conventional cars ad trucks. Over the past 30 days, the Zacks Consensus Earnings Estimate for full-year 2020 has risen from $2.52/share all the way to $4.47/share, earning GM a Zacks Rank #1 (Strong Buy).

Part of the reason for that big increase was a huge beat last quarter when the company reported a net of $2.83/share, almost double expectations. Though several big beats in a row have driven the share price back up over $40/share, that price still represents a forward P/E Ratio of less than 10X.

It’s a legitimate value play.

A lot of attention has been paid to Tesla and other upstart EV competitors lately and rightly so – it’s almost certainly the transportation technology of the future. Investors would be unwise however to forget about the reasonably priced, legacy automaker with over 100 years of experience, trusted and recognizable brands and the scale to make a big splash in the future EV market even as they continue to churn out profits in the present.

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