Shares of General Motors Co. (GM, Financial) have moved sharply higher over the past three months, delivering a total return of nearly 40%. The stock has benefited from a number of positive developments, including an end to the UAW strike against the company, a massive accelerated share repurchase program and strong 2024 guidance provided by 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.
Repurchase program will continue to be supportive of the stock
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 repurchase program as a solid capital allocation decision given the stock's low valuation. Based on a forward price-earnings ratio of 4.50, GM is repurchasing shares at an earnings yield of more than 20%. Given the highly competitive nature of the auto business, I do not believe the company would be able to earn this level of return on capital by reinvesting in the business itself given the historically low ROIC that the company has generated.
Consensus earnings estimates are below company guidance
Currently, Wall Street analysts' consensus for fiscal 2024 call for the company to report adjustd earnings of $7.80 per share. Comparably, during the company's fourth-quarter 2023 earnings release, the company guided for a range of $8.50 to $9.50 for the year. Based on this difference, I believe the company is poised to deliver better than consensus results.
Moreover, the company's guidance itself may prove to be conservative. Historically, around 78% of companies in the S&P 500 have beaten their estimates on a quarterly basis. One reason for this is that company executives generally do not want to disappoint investors.
In early 2023, GM guided for 2023 adjusted earnings per share of $6 to $7 and ultimately delivered adjusted earings of $7.68. The beat came despite the fact the company faced a crippling UAW strike, which had a negative impact on the company.
If the company is able to deliver a similar beat on a percentage basis, as was the case in 2023, versus initial guidance midpoint, the adjusted earnings per share for 2024 would be approximately $10.60 per share.
Valuation is still compelling
GM currently trades at roughly 5 times consensus 2024 earnings per shares. This compares to the broader market, which trades at approximately 22 times consensus 2024 earnings. Surely GM should trade at a multiple which is well below the broader market given the highly cyclical nature of its business and historically low return on invested capital. However, I think the current discount is too extreme. Over the past three years, the stock has traded at an average earnings multiple of 6.80 times. Additionally, GM's closest peer, Ford Motor Co. (F, Financial), trades at roughly 6.60 times consensus 2024 earnings.
The stock currently has a GF Value of roughly $53 per share, which would imply a forward price-earnings ratio of roughly 6.80 times the current consensus and 5.90 times its 2024 guidance. In this case, I agree with the GF Value and believe the stock can trade in the $50 range.
Key risks to the bulls
The most significant risk the GM bulls face is a significant economic slowdown. The auto business is highly cyclical and thus GM would experience a hit to financial performance in the event of an economic slowdown. However, it should be noted the company currently has a very strong balance sheet with just over $36 billion in automotive liquidity. This liquidity buffer should allow the company to ride out an economic storm and make it through the cycle, but the stock price may suffer during the interim.
Another risk GM faces is potential market share losses to competitors as the automobile business is highly competitive and currently experiencing a secular shift toward electric vehicles. For 2023, GM reported total U.S. market share of 16.20%, which represents a roughly 0.30% increase from market share the previous year. The company's share of the EV market as of the fourth quarter of 2023 is estimated at 6.9% and thus, a rapid shift toward EVs has the potential to result in decreased market share for GM.
Conclusion
GM shares have rallied sharply over the past three months due to a number of positive developments, but the bullish move may not be done.
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.
