Yes, Tesla (TSLA) gets the buzz. But there’s a surprisingly scrappy competitor in the electronic vehicle market that investors would do well to pay attention to.
It’s a company that already has a strong foothold in China, the world’s largest auto market. And it’s a company that can lay claim to numerous industry innovations throughout its storied history – it was the first to install turn signals inside vehicles (1939), it was the first to conduct rollover testing (1934), and it invented the anti-lock braking system (1972) and electric fuel injection (1979). Oh, and on the side, it developed the first mechanical heart (1952) and the Lunar Roving Vehicle (otherwise known as the Moon Buggy) which was used during the Apollo 15 mission in 1971.
But best of all, for investors, it’s a company that’s adept at unlocking value, which as contributor David Sterman notes, is happening even as we speak.
— Bob Bogda, Editor
P.S. Like what you see? Don’t like what you see? Let me know.
It’s a tough year for job losses. Challenger & Gray says there were 54% more job cuts in July than June. And through the first seven months of 2020, the pace of layoffs is 212% above year-earlier levels, according to the job-tracking firm.
And it is increasingly likely the pace of job cutbacks will stay elevated throughout 2020, perhaps even into 2021. This is sobering and sad news for those who may end up out of work.
Indeed, this is starting to feel like the early 1990s, when all kinds of companies downsized. A headline in the September 20, 1993, issue of Fortune magazine blared, “When Will the Layoffs End?” Little did those writers know that the end was closer than they realized.
When that article was written, the U.S. had slightly less than 100 million jobs. By the end of the decade, a net new 14 million jobs had been created, according to Staista.com, as newly lean companies pivoted to a hiring spree as the economy rebounded.
Still, in the near-term, as companies grow lean, investors can use the trend to profit. Take retailer L Brands (LB) as an example. Its shares surged 35% on July 29, when the firm said it would lay off 15% of its workforce, shedding $400 million in annual operating expenses. Shares have continued to rise since then and are now up roughly 60% year-to-date.
Yet, it’s not just the cost cuts that are driving shares. L Brands is also pruning its portfolio with plans to sell its lagging Victoria Secrets division. Analysts are convinced that the remaining parts of the business — especially its thriving Bath & Body Works division — will soon get even more of management’s attention as it pursues an expansion strategy. And that bodes well for higher profits down the road.
There’s another similar set-up in place that promises a repeat of that performance. I’m referring to a firm that has been closing down some factories in recent years to grow leaner, even as it invests in a compelling long-term growth strategy.
At the end of 2016, General Motors (GM) had 225,000 employees, according to macrotrends.net. Since then, CEO Mary Barra has made a series of hard choices, including shrinking the firm’s headcount to just 164,000 by the end of last year.
Fast forward to the summer of 2020, and those moves look quite prescient as the auto maker managed to deliver break-even results for its second quarter. GM was able to do so even in the face of sharply reduced sales volumes. U.S. auto sales have been trending around 17 million to 18 million per year in recent years; that figure is likely to plunge to around 11 million in 2020. GM was prepared for that by having adopted a leaner cost structure. Previous management failed to prepare for tough times ahead, forcing the company briefly into bankruptcy in 2009.
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Not only is CEO Barra deftly managing a profound industry sales slump, she’s also been preparing her company to be at the vanguard of the nascent electric vehicle (EV) industry.
Analysts at Morgan Stanley recently noted that if the company’s broad and deep EV engineering plans were valued at the same level as today’s hot young EV upstarts, GM would be worth $100 billion. (That analysis doesn’t include GM’s autonomous driving unit, which could be worth up to another $20 million, according to analysts that follow this industry). For context, GM’s entire current business is worth $41 billion in market value.
Make no mistake, GM isn’t merely researching EVs at this point. Analysts at Deutsche Bank predict that GM will be selling 500,000 EVs each year by 2025. This past March, the firm said it will be rolling out 13 new EVs over the next few years, including a Chevrolet Bolt EUV (electric utility vehicle), several GMC Hummer-based EVs, a mid-size Chevy EUV, the Cadillac Lyriq SUV, two Buick SUVs, and a hand-built flagship Cadillac sedan called, “Celistiq.” Every one of these will have a range of at least 400 miles.
To be sure, 500,000 vehicle sales annually, or 125,000 per quarter, is an ambitious target. Sales of Tesla cars peaked at 112,000 in the fourth quarter of 2019 and have been trending below that peak since then. GM CEO Barra has surely taken note of Tesla’s $382 billion market value, which is more than nine times higher than GM’s market value.
Even as GM has laid out plans for an aggressive rollout of EVs in the United States, it’s plans for China are just as bold. Julian Blissett, GM’s top executive in China, recently told Reuters that the China market “…is rapidly electrifying. Cadillac is on a path to very heavy electrification. Buick is also going to heavily electrify,” adding that various joint ventures run by GM with local partners also intend to roll out a series of all-new EVs in the next few years. “Although Europe and the U.S. have fairly significant plans on a governmental and market point of view, the electrification of cars is going to happen much faster here in China,” Blissett said.
In 2019, GM controlled 12.2% of the Chinese car market, which is now the world’s largest, with more than 25 million cars sold last year. While the current trade challenges with China can’t be readily ignored, the automaker has wisely built a massive manufacturing base within the country, which should help it to curry favor with policy makers that may look to crack down on imported vehicles.
Of course, before the EV onslaught begins, GM still has a traditional car business to run. And the legacy internal-combustion vehicles should see firming demand in the next few years. Analysts at Bank of America predict that per-share profits will hit bottom this year at around $2.25 before rebounding to $4.25 next year and $6.00 in 2022.
Looked at another way, GM is expected to generate $8.7 billion in free cash flow by 2022, even with its massive new vehicle engineering commitments in place. Again, for context, that’s more than twice the projected free cash flow for Tesla in 2022. At some point, as GM’s EV strategy garners many more headlines during upcoming new car rollouts, investors will more clearly see that GM’s shares are simply far too cheap to ignore.
What say we jump to the head of the line?
Action to Take: Consider buying shares of GM up to $38 and be prepared to sell when they reach $55.
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