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Shares of General Motors Co. (NYSE:GM) have risen sharply over the past three months, delivering an overall rally of nearly 40%. The stock benefited from a number of positive developments, including the end of the UAW strike against the company, a large accelerated percentage buyback program, and strong 2024 guidance provided through management.
While a significant number of shares have already been delivered under the ASR, the banks managing the program still have a significant number of shares which need to be repurchased to complete the program. Consensus fiscal 2024 estimates remain well below the company’s recent guidance, which sets the automaker up to potentially deliver better-than-expected earnings per share for the year. Additionally, despite the recently rally, the stock trades at under 5 times forward earnings compared to an average price-earnings ratio of 6.80 over the past few years. For these reasons, I believe GM shares can continue to move higher from current levels.
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On Nov. 29, GM announced a $10 billion ASR program that represented about 25% of the company’s shares outstanding at the time. On Dec. 1, the company advanced $10 billion to a group of banks and received approximately 215 million shares of stock with a value of $6.80 billion. Thus, these shares were repurchased at a price of roughly $31.60 per share. Final settlement of the transaction is expected to occur no later than Dec. 31, 2024. By this time, the banks managing the ASR will be required to deliver GM roughly an additional $3.20 billion worth of shares. The repurchase price will be based on the average daily volume weighted average price of GM shares during the term of the ASR agreements less a discount.
Given these facts, the banks managing the ASR will continue to be active buyers of GM shares throughout much of 2024 in order to acquire shares they need to deliver under the agreement. In addition to the ASR, GM has a remaining authorization of roughly $1.30 billion based on prior repurchase authorizations, which the company can complete if it chooses to do so based on market conditions.
I view the buyback program as a falsified capital allocation resolution given the stock’s low valuation. Based on a forward price-earnings ratio of 4. 50, GM buys back shares with an earnings yield of more than 20%. Due to the nature of the automotive sector, I do not believe the company is willing to reach such a point of return on capital by reinvesting in the business itself, given the traditionally low return on investment it has generated.
Currently, the Wall Street analyst consensus for fiscal 2024 calls for the company to report adjusted earnings of $7. 80 per share. Similarly, when reporting the results for the fourth quarter of 2023, the company forecast an amount of between $8. 50 and $9. 50 for the year. On the basis of this difference, the company is poised to produce effects beyond consensus.
In addition, the company’s own policies may simply be conservative. Historically, about 78% of S companies
In early 2023, GM forecast consistent adjusted earnings with a steady percentage of $6 to $7 for 2023 and eventually returned adjusted earnings of $7. 68. This decision came despite the company facing a crippling strike by the UAW, which negatively impacted the company.
If the company were to post a percentage-like pace, as it did in 2023, compared to the midpoint of the original guidance, percentage-adjusted earnings for 2024 would be about $10. 60 to percent.
GM currently produces about five times the consensus earnings for 2024 in line with the share. This compares to the broader market, which is trading at around 22 times consensus earnings for 2024. cyclical nature of its business and a traditionally low return on invested capital. However, I believe that the current reduction is too extreme. Over the past 3 years, inventory has remained at an average of 6. 80. In addition, GM’s closest counterpart, Ford Motor Co. (NYSE: F), industries with roughly 6. 60 times consensus earnings for 2024.
The inventory currently has a GF of around $53 per share, which would mean a future price-to-earnings ratio of around 6. 80 times the existing consensus and 5. 90 times its 2024 guidance. In this case, I agree with GF Value and think the inventory may be in the $50 range.
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The most significant threat facing GM bulls is a significant economic downturn. The auto sector is highly cyclical, so GM’s monetary functionality would suffer in the event of an economic downturn. However, it’s worth noting that the company currently has a very strong balance sheet. leaf, with just over $36 billion in automotive cash. This liquidity buffer allows the company to weather an economic typhoon and ride out the cycle, but stock value may suffer in the meantime.
Another threat GM faces is the potential loss of market share to its competitors, as the automotive industry is highly competitive and is lately undergoing a secular transition to electric vehicles. For 2023, GM reported an overall US market share of 16. 20%, which is building. an increase of approximately 0. 30% over last year’s percentage. The company’s share of the electric vehicle market in the fourth quarter of 2023 is estimated to be 6. 9% and, as a result, an immediate transition to electric vehicles may prospectively lead to a decline. in GM’s market share.
GM shares have rallied strongly over the past three months due to a number of positive developments, but the upward move may not materialize.
The company’s massive ASR program will continue to serve as an upside catalyst in 2024 as banks work to complete the necessary purchases. Additionally, consensus estimates for 2024 adjusted earnings per share remain well below company guidance, which is likely conservative. Thus, I believe the company is poised to deliver better-than-expected earnings results. Finally, GM’s valuation remains fairly cheap despite the massive move higher over the past few months.
For these reasons, I believe the recent rally can continue.
This article was first published on GuruFocus.