After years of lagging the market, General Motors Company (NYSE: GM) stock came alive in the second half of 2017 on investor optimism about its ability to navigate a softening auto market and its potential industry-leading autonomous vehicle technology.
But even with the stock up 23 percent in the past six months, RBC Capital Markets analyst Joseph Spak says the GM rally may be just getting started.
Spak says there is still plenty of uncertainty for GM investors as the company develops and launches electric car and autonomous vehicle technology. However, GM did a lot to ease investor concerns over its exposure to a weakening auto market in the third quarter. GM estimates that the company would take only a $6 billion to $8 billion hit to its profits in the event of a 25 percent downturn in the U.S. auto market. Spak says investor fears over how GM would weather a steep downturn have kept its stock’s earnings multiple compressed.
“We don’t want to over-extrapolate one quarter, but the results were encouraging enough that we believe investors should begin to fade the overly pessimistic view,” Spak says.
Even after its impressive rally, GM stock currently trades at a forward price-earnings ratio of just 7.2, one of the lowest earnings multiples in the Standard & Poor’s 500 index.
In addition to its compelling valuation, Spak says GM could emerge as a market leader in the highly-disruptive robo-taxi market. In November, GM said it is planning on launching its self-driving robo-taxis in U.S. cities starting in 2019.
“It’s early enough in the story that we still see a lot of potential for that narrative to take hold and for growth/tech investors to look to GM, increasing demand for shares and potentially the multiple,” Spak says.
Still, not everyone on Wall Street is convinced that GM will maintain its dominance in the next generation of the U.S. auto industry. Morgan Stanley analyst Adam Jonas says GM will have to deal with unprecedented competition in coming years. “We believe it may be more difficult for GM to maintain its air of uniqueness in the Auto 2.0 debate as a number of competing investment opportunities may be present in the market,” Jonas says.
Morgan Stanley has…
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