01
Abstract
$General Motors (GM.US)$Its FQ3''22 earnings will be announced on October 25th, 2022.
So far, fears of a recession have damped General Motors Co's stock valuation, falling near its previous support level.
However, given the rise in demand for new cars and inflation in the CPI report in September, demand damage is yet to come.
General Motors Co's new energy company will also prove the key to its large-scale transformation, as the company will consolidate its technology and capabilities in the huge renewable energy explosion in the future.
Combined with its eventual recovery of dividends, General Motors Co has no reason to underperform over the next decade.
General Motors Co (NYSE:GM) is clearly learning from its rival Tesla, Inc. (TSLA) to create a new business unit, General Energy, with a direct focus on residential and commercial purposes.
These include one-stop service for new energy solutions, such as fixed battery packs, solar panels, electric vehicle chargers and other energy management products.
Although Tesla, Inc. has achieved little success and profitability in this area, we expect the situation to improve in the future given the huge upward effect of the solar tariff exemption and the inflation reduction bill.
We are starting to see an unprecedented demand explosion. General Motors Co's preferred partner SunPower (NASDAQ: SPWR) recently reported a 5300 inventory backlog on its FQ2''22 earnings call.
The latter's competitor First Solar (NASDAQ: FSLR) also performed well, with new bookings hitting an all-time high since the beginning of the year and an all-time backlog of production by 2026.
Globally, we expect the adoption of renewable energy to accelerate, with solar demand growing from 1 terawatt in April 2022 to 2.3 terawatts in 2025.
General Motors Co's automobile department is also something to be reckoned with. In September, CPI showed that U. S. consumer demand for new cars was surprisingly sticky. The index rose 0.4 per cent month-on-month and 9.4 per cent year-on-year, indicating that the market still has huge spending power despite rising inflation.
Combined with the projected revenue growth of 21.5% year-on-year and adjusted net profit growth of 6.5% in fiscal year 2022, we expect General Motors Co's performance to exceed that of fiscal year 2022.
02
A rare third-quarter report
S P Capital IQ
In the upcoming FQ3''22 earnings call, General Motors Co is expected to report an income of $41.76 billion and a profit margin of 9 per cent before interest and tax, representing a sharp increase of 16.77 per cent and 2.4 per cent respectively from a month earlier. Although it slowed by 1.9 per cent year-on-year, it still grew by 55.93 per cent.
At the same time, the company's profitability is expected to improve, with net income of $2.84 billion and a net profit margin of 6.8 per cent in the next quarter. This will show a month-on-month increase of 70.05% and 27.92%, respectively.
S P Capital IQ
So it is not surprising that General Motors Co reported a significant improvement in its free cash flow (FCF) generation to $2.48 billion and FQ3''22 's FCF margin of 5.9 per cent.
This will represent a quarter-on-quarter increase of 75.88 per cent and 2 per cent, respectively, from a year-on-year increase of-$4.39 billion and-16.4 per cent in FQ3''21.
As a result, the company's balance sheet will need to be isolated during future macroeconomic deterioration, in addition to strong cash and $19.72 billion in equivalents in the previous quarter. We are also likely to see an increase in dividend payments, although analysts predict that due to General Motors Co's increased capital expenditure, the amount will reach 90 cents in the next quarter.
S P Capital IQ
Over the next five years, General Motors Co expects income and net profit to grow at a compound annual growth rate of 7.81 per cent and-0.15 per cent, respectively. Although UBS believes demand has been disrupted, the market has unusually boosted its bottom line growth by 10.16 per cent since its last article in September 2022.
It has risen 18.8% since July 2022. This is indeed "strange" given the macroeconomic deterioration and the possibility that the Fed may raise interest rates aggressively by 2023. At the same time, the market's general expectations for fiscal year 2022 remain consistent, indicating that the market is cautiously optimistic about the future.
S P Capital IQ
General Motors Co's profitability is expected to improve very well, with an adjusted net profit / FCF margin of 5.1% in fiscal year 2019, 8.2% in fiscal year 2021 and 5.6% in fiscal year 2026.
Its FCF growth will directly contribute to the expansion of its dividend payments, with a compound annual growth rate of 41.42% by fiscal year 2026, offsetting its previous dividend suspension. Between fiscal year 2020 and fiscal year 2026, the compound annual growth rate was still 11.24%.
As General Motors Co's share price is well below its previous high, we will also see an excellent forward dividend yield of 2.14% in fiscal year 2026. This is almost the same as the average yield of 2.33% in the previous four years. This is indeed excellent given the company's active capital spending on electric vehicles and energy.
03
Buy, sell or hold?
5-year EV/ income and Pamp E valuation
S P Capital IQ
General Motors Co's current EV/NTM income is 0.88 times, and the price-to-earnings ratio of NTM is 4.87 times, which is lower than his five-year average of 1.35x and 7.87x, respectively. The stock also traded at $33.57, down-50.05% from its 52-week high of $67.21 and close to a 52-week low of $30.33.
Nevertheless, the market generally believes that General Motors Co's prospects are still promising, because their target price is 57.57 US dollars, up 71.49% from the current price.
GM's five-year stock price
Seeking Alpha
Assuming General Motors Co's new energy, artificial intelligence and super cruise performance is good, we may see General Motors Co's PE valuation readjusted upward, close to Tesla, Inc. 's valuation, which is now 43.42 times. Even if the price is halved, General Motors Co's earnings per share in fiscal 2026 is $7.12, while Tesla, Inc. 's earnings per share in fiscal 2026 is $7.40, based on which his target price is estimated to reach $154.57.
As a result, General Motors Co's market capitalization has more than quadrupled from $48.94 billion to $225.37 billion, close to Tesla, Inc. 's current market capitalization of $687.32 billion.
Of course, all this is speculation, because General Motors Co's median price-to-earnings ratio is still very close to that of its peers, at 4.09 times. The current peak of FUD in the market does not help either, as the Fed is likely to raise the final interest rate to more than 5 per cent, which will cause more pain for the stock market as a whole.
However, although profitability has improved in the future, these pessimism has also caused General Motors Co's share price to plummet. This creates a perfect opportunity for investors who have been waiting patiently for the winner of the next decade, and its forward dividend yield will reach 2.14% by fiscal year 2026 (if capital expenditure slows from fiscal year 2025, dividend yields will rise further).
Therefore, we rate the current level of General Motors Co stock as speculative buying. Bottom investors may wait after the upcoming earnings call, but we expect a modest rebound if the performance is exemplary. Don't miss this trough.