02 Jul General Motors Co (GM)
We put out a few stock reports on Ford last year when the car market was in the doldrums. We recommended buying it at around the $5 mark and it’s now sitting at $15 so it’s been a big money-spinner for us. At the time I was also looking at General Motors as another potential buy. I thought it still had a heap of potential but Ford was the slightly more sensible purchase. GM hasn’t performed quite as well as Ford but it has still more than doubled in price. Their performance over the last year has really impressed me, and with some exciting investments occurring in the EV space, I think it might be worth adding it to the portfolio along with its old-time rival.
General Motors as you already probably know is one of the largest car makers in the world. In fact, from 1931 through to 2007 it was the largest, at its peak controlling 50% of the entire market share of vehicle sales in the United States. In terms of revenue, it is still ranked in the Top 20 largest US corporations according to the Fortune 500, selling more than 10 million vehicles per year worldwide under well-known brands such as Chevrolet, Buick, GMC, and Cadillac.
In Australia, we have always known them as Holden, even though it has always been a subsidiary of General Motors. The first Holden was manufactured in 1948 – the Holden 48-215, and the brand quickly became an Australian icon – along with football, meat pies, and kangaroos according to their own advertising. However, the last Holden manufacturing plant closed down in Adelaide in 2017, and in 2020 General Motors announced the brand would be retired during 2021. The company blamed the high cost of servicing a small market stating “the global consolidation of the automotive industry has made it increasingly challenging to support a brand and a business that operates in only two markets, which represent less than one per cent of the global industry”.
The pullout in Australia coincided with a tough time for the company globally. They had filed for bankruptcy in the US in 2009 and were bailed out by the government to the tune of $49.5 billion through the troubled Asset Relief Programme. However, it turned out to be a good move by the US Treasury who made back $39 billion when they sold their shares, and with the 1.2 million jobs that were saved ended up preserving almost $40 billion in tax revenue.
The comeback in 2010 was untimely. Even though it was selling more cars than ever before shareholders stayed away in droves. Why? Because a tiny little company called Tesla changed the automotive landscape forever. The old-established car makers were written off as has-beens and dinosaurs. Electric cars were the way forward and there would be a changing of the guard. Of course, the world is slowly starting to realise that this may not be the case at all.
We’ve discussed Tesla on countless occasions through the Catch-Up and in these stock reports. We told everybody to get on board back in February of 2020 with the stock going from $130 to $677 in that time. It surpassed all of our expectations, and in reality, surpassed all logic. We got nervous as it was reaching $350 and it has still gone on to double again from there. And yes, it has a first-mover advantage of a sort, that’s why its stock price is where it is. However, this is also where its problem lies.
We talk about first-mover advantage being a massive advantage in a new industry. You get the chance to establish strong brand recognition and customer loyalty before you have any competition. But does Tesla really have a first-mover advantage? I would argue no. Sure it was the first to manufacture and sell electric vehicles on mass. But it is pretty much the last mover in the car industry as a whole. It’s the new kid on the block trying to muscle its way into an already existing market. And it initially had a point of difference – going electric. But what happens when all of your competitors, encouraged by governments (except ours unfortunately), all jump on the electric bandwagon along with you?
They bring all of their experience, all of their brand recognition, all of their industry might, and electrify their cars right next to yours. You no longer have a point of difference. If you’ve been loyal to the one type of car company or brand all of your life are you going to switch to a Tesla or are you going to buy the electric version of your favourite Ford F Series, your Camry, or your Chevrolet? Tesla is priced to take over the car industry, and they’re just not going to.
General Motors plans to have its full stable of vehicles go all-electric by 2035. They will have at least 35 different kinds of EV’s available by 2025, and it hopes 40% of sales will be in EVs by this time. They are developing their own low-cost lithium battery technology, along with LG Chem, which will be adapted to a wide range of vehicles, and it is said the batteries will have a range of up to 450 miles. They have already done a deal with FedEx to supply a fleet of its BrightDrop EV600 battery-electric commercial vans powered by Ultium batteries developed in conjunction with Westinghouse. There will be more of this to follow. GM is no dinosaur.
Most excitingly, in my opinion, they have also joined forces with tech giant Microsoft to develop autonomous driving technology to produce and manufacture self-driving cars. Microsoft is providing the hardware, software, and their cloud computing expertise to join with GM’s automotive expertise. It’s not a niche project. It is being designed to provide this technology on mass to the global industry. I’ll have my car picking me up at the golf club and driving me home in no time.
GM is right in the mix with all of the technology leaders in both electric vehicles and autonomous driving. And yet this is not priced into the share price. GM sold more cars in the US than any other manufacturer in 2020. Vehicle sales were down across the globe thanks to the pandemic but they still managed to sell 2,537,590 vehicles ahead of Toyota’s 2,112,931 and Ford’s 2,034,599. Tesla in comparison sold a measly 292,901. Yet Tesla’s market cap is $653 billion with a PE of 679, while General Motors market cap is just $85 billion with a PE of 9.54. The numbers just don’t add up.
The GM share price had a strong run in the latter half of 2020, but has slowed so far in 2021 and has stalled since March. They are still as cheap as chips compared to competitors and they are well set up to continue to dominate the industry even as electric vehicles take centre stage. They will most likely be a great hold, along with Ford, into the next decade.