The automaker trades for a ridiculously cheap valuation even though it has massive potential.
General Motors (GM 0.63%) is often overlooked by investors in favor of pure-play electric vehicle stocks. But I would argue that not only is General Motors a cheap stock right now, but it could be the most underrated way to invest in both electric and autonomous vehicles in the entire market. Here are just three of many reasons why General Motors is one of the largest stock positions in my own portfolio, and why I plan to continue to build a position over time.
Tons of EV and autonomous potential
While GM’s ICE (internal combustion engine) pickups and SUVs continue to lead profitability, the company is still in the early stages of developing its EV strategy.
So far, the progress has been impressive. The Hummer EV, Chevy Silverado EV, and Cadillac Lyric SUV are a few examples of products currently on the market. In all, GM delivered 22,000 electric vehicles in the second quarter, representing 40% year-over-year growth, and a market share that is 2.2 percentage points higher than it was a year ago. Several new models are arriving in dealerships later this year, and this could create a long-term tailwind for the business.
On the autonomous vehicle side, GM’s Cruise subsidiary recently partnered with Uber to develop a driverless rideshare service, and after a major setback, Cruise vehicles are conducting road tests in three cities.
Incredibly cheap valuation
General Motors trades for a remarkably cheap valuation of 5.5 times trailing-12-month earnings and less than 5 times earnings estimates for the next 12 months. In short, profits have exceeded expectations, and the market doesn’t seem to be putting much faith in the company’s ability to maintain or grow profitability.
This cheap valuation is a result of massive profitability, as GM not only posted its best quarterly sales since 2020 in the second quarter but did so while maintaining pricing power that is above the industry average. The company produced $5.3 billion in automotive free cash flow in the second quarter alone.
Aggressive buybacks
Management clearly thinks General Motors stock is cheap, as it has one of the most aggressive stock buyback programs I’ve ever seen. In late 2023, the company announced an accelerated $10 billion buyback program, which it has used to reduce its outstanding share count by a staggering 18% over the past year alone.
This buyback program has been used, but the company authorized an additional $6 billion buyback plan in June, and management has a near-term target of reducing the outstanding share count to less than 1 billion (currently about 1.14 billion).
When done for the right reasons, buybacks can not only help drive earnings-per-share growth but can be a great way to create long-term value if the stock is purchased below its intrinsic value.
A strong business in the early stages of a big transition
To be sure, this isn’t a low-risk stock by any definition. For one thing, the auto business can be highly cyclical, and sales (and profits) could decline sharply in a recession. Plus, GM has a massive financing business with about $121 billion in outstanding loans, so there’s quite a bit of credit risk as well.
Despite the risks, General Motors is simply too well-run and has too much potential to trade at such a cheap valuation. If the company can execute on its electric vehicle strategy and keep its profitable ICE business going strong, there could be tons of upside for patient investors.
Matt Frankel has positions in General Motors. The Motley Fool has positions in and recommends Uber Technologies. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.