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3 Reasons Why I Want to Own GM in 2021

Shares of General Motors (GM) are outpacing even Tesla (TSLA) so far this year. The company is showing strength in multiple areas of the automotive market. David Cohne lays out three reasons why investors should consider buying the stock.

While Tesla (TSLA) was a big winner in 2020, with an astronomical gain of 743.4% for the year, General Motors (GM) appears to be leading the way in 2021. The stock is already up 34.8%, compared with a 21.2% gain for TSLA and 2.5% for the S&P 500. That's quite the gain over twelve trading days for a traditional automaker. Even better, though, I believe it has much further to go this year, and I'll explain why below.

Strong Demand for Trucks and SUVs

While GM stock fell at the beginning of the pandemic, as it had to stop North American production for a couple of months, it bounced back as soon as the economy opened up in the summer. The company reported healthy profits for the third quarter and sales continued to trend higher in the fourth quarter. This recovery was fueled by strong demand for its lineup of full-size trucks and SUVs.

In the fourth quarter, sales of its full-size truck surged 11% year over year. The company also saw a 25% increase in domestic deliveries for its full-size SUVs. Its full-size trucks and SUVs are primarily driving growth for the company right now. That's because trucks and SUVs have much higher profit margins than smaller sized sedans. In fact, trucks and SUVs typically generate over $10,000 in profit per unit for GM.

That profit stream should continue to grow as the company maximizes output at its existing factories and adds more production capacity with its new truck and SUV plant in Canada.

Electric Vehicles and Autonomous Driving

While trucks and SUVs drive growth right now, it's the company's future in electric vehicles and autonomous driving that is driving its stock price higher. The company has upcoming launches with the GMC Hummer and Cadillac Lyriq. GM plans to spend $27 billion over the next five years on electric and autonomous vehicles. The company even recently announced that it is looking into creating an electric Corvette crossover.

The plan is to launch 30 EVs globally by 2025, with more than two-thirds available in North America. All of the company's major brands will have models available. GM's EV plan is contingent on its Ultium battery technology. The company expects its next-generation Ultium batteries to double the energy density of today's batteries at half the cost.

GM has also recently announced its new business, BrightDrop, which will feature an electric delivery van for commercial customers and an electric delivery box for short-distance parcel transport. In addition to EVs, GM has been working on driver assistance systems. According to Consumer Reports, GM's Super Cruise system was the best and outperformed TSLA by a wide margin, especially in areas such as keeping the driver engaged.

Shares of GM soared over 10% on Tuesday after news that Microsoft (MSFT) will join a new round of investment for Cruise. MSFT will join GM and Honda Motor (HMC) in a funding round of $2 billion for Cruise, which brings its total valuation to $30 billion, on par with Ford's (F) valuation. As part of GM's agreement with MSFT, Cruise's autonomous taxis will use MSFT's Azure cloud-computing platform, and Azure will become the preferred cloud-computing platform for GM.

Valuation and Target Price

Even with its strong potential for growth, GM stock only has a forward P/E of 8.35, compared with TSLA's 204.1. GM's valuation numbers across the board indicate it is currently trading at a low valuation. It's Price to Sales ratio is 0.7, compared to an average of 1.2 for the industry. In addition, its EV/EBITDA is only 8.8, compared to 42 for the industry.

Even though the stock is up almost 35% for January and 112.9% over the past six months, it still has plenty of upside left, according to some analysts. Deutsche Bank analyst Emmanuel Rosner recently raised the firm's price target on GM to $64 from $48. He sees strong volume growth in 2021 for U.S. autos as people want more comfort, privacy, and protection from COVID-19. Rosner is not alone in this regard, as JPMorgan raised its GM target to $63, calling it a significant contender in autonomous driving.

Final Word

GM is rated a "Strong Buy" in our POWR Ratings system. It also holds the distinction of having a grade of "A" in every POWR component, including Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is also the #4 ranked stock in the Auto & Vehicle Manufacturers industry. 

While our ratings system is qualitative in nature, I believe it is also a "Strong Buy" from a qualitative perspective. The company sees strong demand for its current lineup of full-size trucks and SUVs, has a pipeline of high growth electric vehicle and autonomous driving products, and is currently undervalued based on numerous metrics.

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GM shares fell $0.15 (-0.27%) in after-hours trading Wednesday. Year-to-date, GM has gained 34.15%, versus a 2.68% rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.


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