Morningstar

Good News from GM, Shares Attractive

Optimism after analyst day sends the stock soaring, but we still think shares look cheap.

Securities In This Article
General Motors Co
(GM)

GM's GM stock rose on Jan. 11 at times by nearly 9% after it announced 2019 guidance at a New York analyst day. We had been modeling 2019 adjusted diluted EPS of $6.39, well above consensus of $5.86, because of GM's ability to keep realizing more scale and its fresh light truck offerings in the U.S., so the guidance results in only a $1 per share increase in our fair value estimate to $47. For 2019 GM expects adjusted automotive free cash flow, which excludes the Cruise autonomous vehicle business, of $4.5 billion-$6.0 billion, up from $3.4 billion in 2018 including a discretionary pension contribution. GM guides for adjusted diluted EPS of $6.50-$7.00, and we now model $6.54. The stock also reacted favorably to GM saying it will exceed its 2018 EPS guidance given on Oct. 31 of $5.80-$6.20. GM reports results on Feb. 6.

We have long argued GM has more economies of scale to realize as it consolidates manufacturing down to five global architectures next decade and builds up GM Financial. We also expected robust light truck contributions in 2019 from the new generation full-size pickups launched last August and new Cadillac crossovers such as the XT4 already out and the XT6 due this year. We were pleasantly surprised at GM's optimism for 2019 given macroeconomic uncertainty from U.S. autos being late in their cycle and tariff risk. Risks include whether GM's expectation of U.S. industry sales in the low 17 million unit range holds and headwinds from an SUV plant shutdown this year, but cost savings from the November restructuring announcement and fairly new crossovers are expected to more than offset these risks.

GM's 2019 annual dividend will again be held flat at $1.52 per share, which does not surprise us. We've long expected the dividend to be kept at a level that is sustainable in a recession, which means at times no growth. Buybacks will still be done within GM's existing framework of targeting $18 billion in automotive cash and reinvesting in the business.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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