A generation ago the Dow Jones Industrial Average was filled with stocks like United States Steel (NYSE:X) and O-I Glass (NYSE:OI), known then as Owens-Illinois. They made basic goods other manufacturers turned into consumer products. Today these companies are barely noticed. The world has moved on. Technology rules, and biology is rising. Today’s Dow is filled with consumer stocks like McDonald’s (NYSE:MCD), tech stocks like salesforce.com (NYSE:CRM), and retailers like The Home Depot (NYSE:HD). Manufacturers like General Motors (NYSE:GM), dropped from the Dow in 2009 during the financial crisis, have been left behind. Can GM stock return?
Over the last year GM says it has come roaring back. The stock’s value is up nearly 200%. It closed March 19 at nearly $60 a share, a price-to-earnings ratio of nearly 14, on 2020 sales of $122 billion.
But little has changed. GM sales fell off a cliff last year. They were $137 billion in 2019, and $147 billion in 2018. Net income has dropped from $5.33 a share in 2018 to $4.33 per share in 2020. Operating cash flow was up 10% last year, but debt levels haven’t changed.
What has changed is hope. The rise of Tesla (NASDAQ:TSLA), and the determination of GM CEO Mary Barra to follow it into self-driving electrics, has investors believing in car stocks again. There were 276 million cars registered in the U.S. in 2019. Just a few million were electrics. But if they’re all changed over there’s a gold mine, the thinking goes.
GM also wants to copy Tesla’s business model, controlling cash from technology and semi-autonomous driving. GM ads now feature its Ultium battery and electric motor technology. To gain scale, Ultium will also power cars from Audi (OTCMKTS:AUDVF) and Honda (NYSE:HMC). GM is also copying Tesla’s strategy of starting with the high end of its line. Ready for an all-electric Hummer?
Comeback Overbought?
Analysts who once shunned GM stock like kids being offered spinach are now pounding the table for it. All 11 who follow it and tracked by TipRanks are screaming “buy” even though their one-year price targets are just 9% above the current price. Barra insists the stock has just begun to move.
Right now, it’s easier to find Chicago Bears than GM bears. But GM plants are currently shut due to a shortage of computer chips.
GM’s strategy hasn’t really changed. It was always going to use its gas-powered profits to launch an electric and autonomous future. The only thing that’s changed is the market’s willingness to buy the story.
For 2021, GM has set very conservative guidance and may fly past earnings estimates. Everything is about 2023 and 2024. That’s when its electrics are supposed to hit showrooms and people are expected to buy, buy, buy.
But this is true for the entire industry. Investors in Volkswagen (OTCMKTS:VLKAY) and Ford Motor (NYSE:F) have done even better than GM investors since 2021 began. The only major car maker whose stock is down so far is Tesla.
The Bottom Line
GM investors are smiling right now, but its big comeback remains purely speculative.
Investors probably think they can’t lose. If buyers don’t all turn to electrics, then GM wins. If they do, then GM wins. Electrics are easier to make than gas-powered cars. Their technology platforms make them, potentially, more profitable, as Tesla has shown.
But Tesla is still scaling its production. Europe is now the biggest electric vehicle market. GM has virtually abandoned Europe.
It was wrong to assume GM was dead a few years ago and couldn’t produce electrics. It may be just as wrong to assume GM will dominate the electric market now.
At the time of publication, Dana Blankenhorn owned no shares, directly or indirectly, in any companies mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack newsletter.