EV Cost Cuts And AV Focus Will Drive Operational Efficiency

Key Takeaways

• GM's focus on EV strategy refinement and increased manufacturing efficiency aims to boost revenue and net margins without expanding its portfolio.
  
• Shifting supply chain strategies to enhance U.S. content and reduce tariff exposure is expected to positively impact net margins and earnings.
  
• Tariffs and competition in the EV market, combined with supply chain and capital constraints, may pressure GM’s profitability, market share, and future revenue growth.

Catalysts

Designs, builds, and sells trucks, crossovers, cars, and automobile parts worldwide.

• General Motors is planning to continuously refine its EV strategy by focusing on cost reductions and increased manufacturing efficiency rather than expanding the portfolio, which is expected to enhance the company's revenue and net margin.
  
• GM's strategic move to increase full-size pickup production and develop U.S. vehicle production further is aimed at offsetting tariff impacts, likely strengthening revenue and EBIT adjusted margins.
  
• The company's emphasis on increasing U.S. content and compliance with USMCA through shifts in supply chain strategies including developing U.S. sources for critical battery materials could reduce tariff exposure, positively impacting net margins and earnings.
  
• GM is focusing on leveraging AI and accelerating its AV investments in collaboration with NVIDIA to enhance operational efficiencies and technological advancements, potentially improving profitability and EPS as these systems become integrated.
  
• The strategic sale of GM’s share in the Ultium Cells plant to LG Energy Solution to recoup capital investments will allow GM to reallocate resources to other high-return investments, enhancing free cash flow and eventually contributing to EPS growth via optimized capital allocation.

General Motors Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming General Motors's revenue will decrease by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 4.5% in 3 years time.
• Analysts expect earnings to reach $8.2 billion (and earnings per share of $8.62) by about May 2028, up from $7.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $12.4 billion in earnings, and the most bearish expecting $2.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 7.1x on those 2028 earnings, up from 5.8x today. This future PE is lower than the current PE for the US Auto industry at 13.9x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

General Motors Future Earnings Per Share Growth

Risks

• The $4 billion to $5 billion impact from tariffs, particularly on vehicles imported from Korea, along with additional tariffs on parts, could exert pressure on costs, thereby affecting GM’s net margins and overall profitability.
  
• Although GM is committing to offsetting a portion of the tariff impacts through self-help initiatives, uncertainty in achieving these offsets may affect projected earnings if mitigation strategies fall short or are delayed.
  
• GM's capital allocation constraints, combined with unchanged CapEx guidance, could limit the flexibility to make significant strategic investments or adjustments needed to counterbalance adverse effects or capitalize on opportunities arising from tariff changes, thus impacting future revenue growth.
  
• Strong competition, particularly in the evolving EV market, requires sustained investment and execution, yet GM is moderating EV production to align with demand, potentially stalling its market share growth and impacting long-term revenue potential.
  
• Persistent risks from global supply chain challenges, adverse currency fluctuations, and warranty-related costs continue to pressure GM’s operating margins and could ultimately weigh on earnings if not carefully managed.

Valuation

• The analysts have a consensus price target of $54.387 for General Motors based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $83.0, and the most bearish reporting a price target of just $34.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $181.2 billion, earnings will come to $8.2 billion, and it would be trading on a PE ratio of 7.1x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $45.46, the analyst price target of $54.39 is 16.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.