On Tuesday morning, General Motors (GM) reported its fourth-quarter pretax profit fell by 54% to $1.8 billion. In a letter to shareholders, CEO Mary Barra affirmed the company's position for their future by writing, "In our EV business, we expect our US portfolio will become variable profit positive in the second half of the year based on our current expectations for EV demand and production growth, strong interest in our vehicles, lower commodity prices and other factors."
In an exclusive interview with Yahoo Finance Executive Editor Brian Sozzi, Barra reaffirmed that sentiment and discussed GM's performance, focus, and goals for the future.
Garrett Nelson, CFRA Research VP & Equity Analyst, joins the Live show to give his insights to GM's proposed goals for the future.
When asked about EV goals and outlook on profit margins, Nelson states: "There are no question the margins are strong from the gas-powered vehicles. The internal combustion engine business is strong. But it's just that they're gonna have to pivot in term of their capex and operational plans. They've indicated that they're in the process of making that pivot. They took a very shareholder-friendly action in terms of announcing a $10 billion stock buyback in November and as a result the 2024 EPS guidance, the growth that they're forecasting, is almost entirely a reflection of a reduced share count driving that EPS growth... It's really a question of how they navigate this transition to EVs and it's going to be gradual probably over the next 10 to 15 years, whereas before they were planning on making a more aggressive shift to EVs. The problem is that the EV market is oversaturated right now."
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live. Editor's note: This article was written by Nicholas Jacobino
Video Transcript
MARY BARRA: I'm working hard to make sure we're leading in electric vehicles in the countries that we operate. I'm also very focused that we have software that creates a whole new customer experience. And then autonomy, I hope people in five years say, they've done that. And they're in a leadership position.
SEANA SMITH: So is GM on track to be an EV leader. For more, we want to bring in Garrett Nelson. He's CFRA's vice president and equity analyst, alongside "Yahoo Finance's" Executive Editor Brian Sozzi.
Garrett, it's great to see you here. So let's start with what we just heard from Mary Barra from Brian's interview with her. And bringing it back to what we were just getting here from these results, GM saying, that they expect to be EV profitable in the second half of the year.
What does the future look like for EVs for GM? How big of a player are they going to be?
GARRETT NELSON: Thanks for having me. Well, we're very skeptical of that comment. And what we've seen over and over the last few years from automakers is that their outlooks for EVs in terms of profitability and production growth has been much rosier than things actually turn out.
So we think this is another case of that. We would be shocked if they even approached profitability for these EV models that they have coming out. And it's probably not going to happen for at least the next two or three years.
So if you look at the US EV market, Tesla accounted for 45-- 55% of all EVs sold in the US last year. Everyone else accounted for the other 45%. So GM's EV market share is currently very small. And they're introducing a lot of new models, the Chevy Blazer EV, Chevy Silverado pickup, the Equinox, and others into a market that is already extremely oversaturated.
So we would be surprised if they were able to follow through on that.
BRIAN SOZZI: And Garrett, why do you think they put out that outlook today?
GARRETT NELSON: Well, I think because there's so many questions surrounding their EV strategy. They've been the most aggressive of the Detroit 3 by far in terms of EV investment and growth, the partnerships with LG, the development of the Ultium battery. But they've been slower in bringing a lot of these models to market than they were forecasting before.
But we're at a point where now in the next 12 months or so, some of these models are finally going to be hitting the roads. And so I think it's just a matter of the questions. A lot of investors are second guessing the decisions made years ago to invest so heavily in EVs, when it turns out that what consumers are demanding are more hybrid models, and not necessarily pure battery EVs.
And so they're at a point where they're going to have to pivot, we think, their portfolio and putting out-- cater to more what consumers are demanding, which is more hybrids.
BRAD SMITH: Does that mean a headcount pivot as well? We've just gotten a new agreement that all of the big three were able to net basically fourth quarter last year that sets them up for building out the future of EVs. But if the demand is not there, as you're saying, then they've got to shift and move things around and reallocate resources.
GARRETT NELSON: So that's going to be difficult for GM and the other Detroit three companies because of the new UAW deal. So as part of that agreement reached in November with the new UAW contract is they have a right to strike over announced plant closures.
And so they're limited in terms of their ability to reduce headcount. There's only so much they can do. But listen, not to take away from what was a very strong quarter, the company did a very good job navigating operational disruptions from the UAW strike. And the guidance that they put out for 2024 was much better than expected. So give them credit.
But what we're seeing is a stock that has rebounded very sharply over the last two to three months since the UAW deal was reached. The stock bottomed around $26. Now, looks set to open somewhere in the $37 to $38 range.
SEANA SMITH: So Garrett, given your skepticism about EV demand, what exactly that's going to look like, if in fact GV does not reach its EV goals? How much pressure could we then see on margins?
GARRETT NELSON: Yeah. That's a good question. There's no question the margins are strong from the gas-powered vehicles. The internal combustion engine business is strong. But it's just that they're going to have to pivot in terms of their CapEx and operational plans.
Now, they've indicated that they're in the process of making that pivot. They took a very shareholder-friendly action in terms of announcing a $10 billion stock buyback in November. And as a result, the 2024 EPS guidance, the growth that they're forecasting is almost entirely a reflection of a reduced share count driving that EPS growth.
It's really a question of how they navigate this transition to EVs. And it's going to be gradual probably over the next 10 to 15 years. Whereas, before, they were planning on making a more aggressive shift to EVs. The problem is that there's-- the EV market is extremely oversaturated right now. Inventories in terms of days supply in the US are well North of 100 days, which is very high.
And the dealerships themselves are begging the company. Please, produce more hybrid models and not these pure play, pure battery EVs, which just aren't selling and are sitting on lots. And they're having to discount and raise incentives in order to move that inventory.
BRIAN SOZZI: Garrett, I hear your points. And they definitely make a lot of sense. But when I look at the valuation of GM, 4 and 1/2 times forward earnings. Tesla's trading at about 58 times. The broader market's about 22 times. Even given all those concerns, can you, at least, make a case that GM, from a valuation standpoint, is just too hard to ignore?
GARRETT NELSON: So our point is, yes, the stock's inexpensive. Automakers tend to trade at some of the lowest multiples of any industry in the market. But in our opinion, the stock is cheap for a reason. And so we view it as a value trap. And especially, given this rebound, yes, there may have been an opportunity that was missed right around when the UAW strike was resolved, given the bounce the stock has had.
But we're reluctant to recommend to our clients here at these levels that they buy the stock if you take a longer term view of this story, GM has been losing market share in their primary market, the United States, for decades. Their market share was about 16% of all vehicles sold in the US last year. Back in 2008, it was 22%. If you go further back to 2000, the market share was 28%.
So we like companies, we like stocks that are actually growing their market share and also producing EVs profitably, namely, Tesla.
BRAD SMITH: All right. Cheap for a reason. Some strong words there. Garrett Nelson, who is the CFRA VP and equity analyst there. Garrett, appreciate the time here.
