General Motors was once the largest corporation in the world and the king of U.S. auto makers. Foreign competition ate away at its customer base and profits and the financial crisis dealt the final blow. In 2009 the once-king of U.S. automakers filed for Chapter 11 bankruptcy protection with US$172.81 billion in debts and US$82.29 billion in assets. The company divested itself of numerous assets keeping the Chevrolet, Cadillac, GMC, and Buick brands as well as controlling interests in numerous foreign automobile operations. After reorganization, the new GM emerged in a $20.6 Billion IPO in November of 2010. Any money invested in the new GM at the time of its IPO has doubled, counting dividends and stock appreciation. All of this having been said, is it time to invest in GM for the long term?
Is It Time to Invest in GM?
Simply based on its dividend of 3.9% and a share price that is just 6.1 times its projected earnings, GM looks attractive. This may well be why Warren Buffett increased the Berkshire Hathaway stake in GM to 37% and now holds 5.1% of GM shares. However, projected earnings that are the big question for all automakers these days. The industry is undergoing fundamental changes and only those automakers that adapt, innovate, and work with maximum efficiency will survive and prosper. If you believe that GM will lead the group of survivors, then you believe that it is time to invest in GM.
The factors that we see affecting the auto industry all derive from new technologies and the effects of these technologies on how we live, communicate, work, buy services, own cars (or not), and drive (or not).
The leader in the field of commercially producing and selling electric cars has been Tesla. Tesla was founded in 2003 and after ten years of making electric cars was the best-selling manufacturer of plug-in electric passenger cars by 2018. They have delivered almost a quarter of a million electric vehicles and have a market share of 12%. Many in the auto industry see the electric car or electric-gasoline hybrids as the future of the auto industry.
And GM has been selling electric cars as well and is catching up to Tesla. According to Investor’s Business Daily, as if January of 2019 GM joins Tesla in the top tier of electric car sales, having sold more than 200,000 electric vehicles at which level the Federal Electric Vehicle Tax Credit starts to reduce. (Tesla passed this milestone in July of 2018.)
The issue with Tesla for years has been a huge amount of debt and not enough sales to show a profit. One of the factors that have supported Tesla has been the $7,500 tax credit for those who purchase electric cars. As the tax credit goes down, Tesla is having to sell their cars for less to make them competitive and this cuts into their attempts to make a profit.
In the electric car arena, GM needs to produce good cars to compete with and beat the likes of Tesla and do so at a profit. Those who believe that it is time to invest in GM also believe that GM can do this.
This may be a much smaller niche in the near term, but as computer technology and artificial intelligence advance, we may come to a point where all cars offer the option of letting the car drive itself. Seeking Alpha looks at the self-driving unit at GM and says it could be valued at more than the rest of the company combined. The writer predicts a world-wide autonomous car market of $7 Trillion by the middle of the century!
More information and detail about the autonomous vehicle market can be found at Allied Market Research.
Autonomous Vehicle Market by Level of Automation (Level 3, Level 4, and Level 5) and Component (Hardware, Software, and Service) and Application (Civil, Robo Taxi, Self-driving Bus, Ride Share, Self-driving Truck, and Ride Hail) – Global Opportunity Analysis and Industry Forecast, 2019-2026
As the complicated introduction indicates, there are a lot of players involved and a lot of pieces to this puzzle from the level of automation of the vehicle to the type of vehicle and how it will be used.
An autonomous vehicle also known as a self-driving vehicle uses artificial intelligence (AI) software, light detection & ranging (LiDAR), and RADAR sensing technology, which is further used to monitor a 60-meter range around the car and to form an active 3D map of the current environment. The vehicle is designed to travel between destinations without a human operator.
To accomplish this goal, the auto used LiDAR, RADAR sensors, and sophisticated computer software. Developing each subsystem and integrating all of it is a complicated task and must be carried out with maximum efficiency in order for a company to make a profit!
A lot of major automakers are working on this technology as are auto suppliers, technology providers and even service providers.
Automakers include General Motors, Daimler AG, Ford Motor Company., Volkswagen Group, BMW AG, Renault-Nissan-Mitsubishi alliance, Volvo-Autoliv-Ericsson-Zenuity alliance, Groupe SA, AB Volvo, Toyota Motor Corporation, and Tesla Inc.
Technology companies include Waymo, NVDIA Corporation, Intel Corporation, Baidu, and Samsung.
Additional companies are Robert Bosch GMBH, Aptiv, Continental AG, Denso Corporation, Uber, Lyft and Didi Chuxing.
That is a lot of folks to keep track of. The consensus of experts is that Waymo is the technology leader in this field followed by GM. Waymo, by the way, is a subsidiary of Alphabet (Google)!
The short version is that GM is one of the two leaders in work to developing, market and sell self-driving autonomous vehicles.
If you see GM as successful in this quest, it is time to invest in GM!
Who Is Going to Own Cars in the Future?
A factor to consider when investing in any automaker is that more and more people cannot afford to buy or least a car. And many of these folks live in large cities where public transportation is an option. These folks can rent a car by the day or even by the hour when they really want or need an automobile.
This may well reduce the overall demand for vehicles and put more cars into the hands of rental agencies and the likes of Uber. The ability of downsize as needed and the ability to sell to a global sales network will be important for future auto industry success.
Who Will Sell Cars in Asia?
Access for foreign markets will also be important to the success of automakers of the future. Despite the threat of a trade war and bullying from the current U.S. president, GM is likely to stay in China where its profit margins are better than in North America and where it and its partner have a decent market share. If you believe that GM is wisely staying where the business is, then it is tie to invest in GM. The concern about GM in China is not GM but China. The Land of Managed Capitalism has a bunch of problems, not the least of which is the trade war with the USA. Nevertheless, Asia is a grown area while North America and Europe are mature markets. A company that is smart enough to reduce production capacity where it is selling fewer cars and beefing it up where sales are still healthy is a good bet. Maybe it is time to invest in GM.