Electric vehicles can be expensive to develop and build. But Nomura analyst Anindya Das believes General Motors can make money selling EVs, and that possibility led him to change his thinking about the century-old auto maker.
On Wednesday, Das upgraded GM (ticker: GM) stock to Buy from Hold. His price-target increase is big, more than doubling to $60 a share from $27.
GM has been investing a lot in EVs recently. The company plans to have 30 all-electric vehicles on the market by 2025. What’s more, GM plans to spend roughly $27 billion in capital from now to then on EV and autonomous-driving development.
For the stock to work, GM will have to earn a nice return on all that capital. But making money on EVs isn’t assured. Tesla (TSLA), the world’s most-valuable EV company only recently began producing consistent profits. Batteries and electric motors are still more expensive than internal combustion engines and a gas tank, even though EV-related costs are coming down.
“Although electrification is costly,” writes Das, he believes in GM’s EV strategy is sound. It involves cutting overall costs to protect profits, vertically integrating battery design and production, and, importantly, sharing EV-development costs with other car companies.
GM and Honda Motor (HMC) signed a memorandum of understanding in September 2020 aimed at establishing an alliance in North America. The partnership would allow both companies to share EV- and gasoline-powered car platforms, driving down the cost of both.
The regulatory environment should also help boost profits for all EV makers, including GM. “With Biden about to become the next US President, and the Democrats now in control of the Senate as well as the House, we believe that the pace of change in regulatory requirements for reducing CO2 emissions in GM’s largest market, the US, is set to accelerate,” adds Das. CO2, or carbon dioxide, is the main greenhouse gas blamed for global warming.
Regulatory tailwinds, a smart electrification strategy and a third factor—a recovery in U.S. auto sales from a difficult, pandemic impacted 2020—is the final reason Das is more bullish. U.S. car sales dropped roughly 15% in 2020 from 2019. But sales are likely to recover to more than 16 million light vehicles in 2021, about the same level as before the pandemic.
The improvements should result in higher earnings. Das now projects GM’s 2021 earnings per share will hit $5.90, up from a prior estimate of $3.86. Improvement also means a better valuation multiple. His target multiple now stands at about 10 times projected earnings, up from 7 times.
Other analysts have been warming to GM stock recently, as well. Today, almost 90% of analysts covering the company rate shares at Buy. Today, almost 90% of analysts covering the company rate shares at Buy; a couple of years back, the ratio was about 67%. The average Buy-rating ratio for stocks in the Dow Jones Industrial Average is consistently in the mid-50%s.
The average price target on GM stock for Buy-rated analysts is about $53, according to FactSet. On that metric, Das is a little more bullish than the bulls.
GM stock is up 2.5% to $49.03 in midday trading. The S&P 500 is up about 0.2%.
Write to Al Root at email@example.com