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GM Investor Day: Margin expansion front and center

AInvestThursday, Oct 10, 2024 3:16 pm ET
2min read

During GM's Investor Day, the company reinforced its strategic direction and commitment to a balanced approach focused on ramping up its electric vehicle (EV) offerings while maintaining a strong emphasis on cost control, efficiency, and shareholder returns. The event, which took place at GM's Ultium battery cell and manufacturing plants, showcased the company's pragmatic strategy in executing its EV roadmap without compromising on its core internal combustion engine (ICE) business. Although there were no dramatic shifts in strategy, GM reiterated its focus on simplifying operations to improve profitability across its ICE and EV portfolios.

One of the highlights of the day was GM's guidance for 2025, which is expected to deliver similar earnings before interest and taxes (EBIT) as in 2024, implying substantial upside in earnings per share (EPS). GM estimates EPS to fall in the range of $11.50 to $12.00 for 2025, significantly above the current consensus of around $10. This optimism is supported by the company's $2-4 billion year-over-year improvement in EV EBIT, attributed to higher production volumes and reduced battery costs, although there remain questions about whether GM's ambitious EV profit targets are achievable if market demand doesn't materialize as expected.

GM also emphasized its continued focus on cost reduction as a core element of its strategy, highlighting its ability to eliminate 10% of unnecessary parts in vehicles, which results in lower logistical and design costs. The simplification efforts have extended to GM's ICE portfolio, where they expect an average 9 percentage point improvement in EBIT margin for the new vehicle models set to hit the market in the coming years. This disciplined approach to managing complexity and costs is seen as crucial for sustaining profitability, especially as the company transitions toward a higher mix of EVs.

While GM’s ICE business remains a reliable pillar for funding future growth, the company is positioning itself to substantially reduce EV losses by $2 to $4 billion in 2025, with half of these savings coming from scaling production and the other half from lower battery costs. This indicates that 2024 may represent peak EV losses, setting the stage for more sustainable profitability in the years ahead. The company also announced plans to launch 10 new generation 2 EVs, which are expected to contribute positively to both pricing and margins.

Despite the positive developments, GM did not provide an update on its Cruise autonomous vehicle unit, leaving investors with unanswered questions about its long-term strategy in this space. However, GM did confirm its commitment to returning capital to shareholders, highlighting its ongoing share buyback program. Since 2023, GM has repurchased $16 billion worth of stock, reducing its outstanding share count significantly, with expectations to have fewer than 1 billion shares outstanding by early 2025.

From a valuation perspective, GM continues to trade at a relatively low price-to-earnings (P/E) multiple, currently around 5x estimated 2025 earnings, despite delivering robust financial performance. Investors remain hesitant to give GM a higher multiple until there is greater confidence in the sustainability of its earnings, especially given the potential headwinds in pricing and market conditions. However, if GM achieves its targets, the company could be in line for a valuation re-rating, supported by its consistent free cash flow generation and disciplined capital allocation.

The market reaction to GM's Investor Day was relatively modest, with shares seeing a slight uptick, underscoring investor caution. While GM has outperformed peers like Stellantis and Ford this year, its market value has not seen the same level of growth, mainly due to investor skepticism about the broader auto industry's long-term prospects. Nevertheless, GM's focus on both EV and ICE strategies, coupled with its disciplined financial management, positions it as a potential leader in the evolving automotive landscape.

Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.