General Motors: Why $27 Billion And A Battery Platform Makes It Not Just Another EV Story

Summary

• General Motors has pledged a shift towards a business model that is expected to increasingly focus on Electric Vehicles.
• With an aim to launch 30 new EVs by 2025, the company has set an ambitious target of being a pure-EV company by 2035.
• The company’s battery technology platform, Ultium, which is a joint venture with LG Chem, could potentially help GM dominate one of the critical industries of the EV revolution.
• DCF Analysis of the stock results in a target price of $78.73, a 32% upside to the March 19th closing price.

General Motors (NYSE: GM) has announced plans of undergoing a complete makeover, one that would make it unrecognizable by 2035, the year when it is expected to be an all-electric player. To show how serious it is towards achieving this goal, the company has already set a medium-term target of launching 30 new EVs by 2025. GM also intends to sell a combined total of about a million EVs in North America and China by 2025.

The new-look GM has definitely got the markets excited, with its stock price already up 44.21% year-to-date. Despite the surge, the stock still has a long way to go, especially once the short-term headwinds subside and the company makes further inroads in China. In this article, I highlight some of the EV-related catalysts for GM and also calculate the target price using DCF Analysis.

The Future Looks Electric

“For General Motors, our most significant carbon impact comes from tailpipe emissions of the vehicles that we sell – in our case, it’s 75%. That is why it is so important that we accelerate toward a future in which every vehicle we sell is a zero-emission vehicle.”

                                                                                   GM CEO Mary Barra

One can question whether GM’s ambitious target of being fully electric by 2035 is politically motivated, especially since it came a day after President Biden signed his intention to make climate change his top priority. However, this seems unlikely, especially since the company has already committed $27 billion investment to release 30 new EVs by 2025. The company also announced its intention, during its latest earnings release, to sell a combined million EVs in North America and China by 2025.

Furthermore, the shift towards EV also comes at a time when stricter emission standards are expected to hit the road in the company’s other core market, China. The China 6a standards were already implemented in January 2021 and the 6b Standards are set to be implemented by July 2023. These standards are expected to hit the sales of gas guzzling SUVs, thereby making the company’s decision to switch to an EV strategy even more crucial and a massive step in the right direction.

Lastly, global EV sales are expected to hit 12.2 million by 2025 compared to a meagre 2.5 million in 2020. China is expected to lead the way, with IHS Markit expecting Chinese EV production volumes to hit 4.8 million units, accounting for a 17% market share. The timeline for GM’s EV strategy, therefore, puts the company in a perfect position to take full advantage of China’s EV boom.

The Ultium Trump Card

One can safely bet that battery technology will be at the forefront of the upcoming EV wars. There has been a lot of movement in this area recently, with Volkswagen being the latest to throw its hat into the ring (The fact that Volkswagen decided to throw its South Korean suppliers under the bus just shows how desperate companies are to gain a stronghold in the EV battery business).

GM is no different. GM’s battery technology, known as Ultium, which it pursues as a joint venture with LG Chem, is set to get better and cheaper in its second-generation avatar, slated to launch by 2025. Recently, the company signed an agreement with MIT spinout to jointly-develop the next-generation EV batteries that are expected to reduce the cost of the technology by 60%. Although analysts expect Tesla to continue to have the lowest costs in the EV industry until 2030, I believe that this move by GM should help the company to close the gap by the time we get closer to its EV timeline. Furthermore, GM’s intention to license the technology to its competitors in the future not only opens up a new source of revenue but also allows the company to potentially dominate an industry that is expected to truly unlock the EV revolution.

Valuation

DCF Analysis was conducted to estimate the target price of GM'S stock. The following were the key assumptions made in the analysis:

Net Income Growth	5.80% for the first two years; 5.94% for the next three years (as per company projections)
Growth Rate Used to Calculate Terminal Value	1.5%
Capex	$10,000 million for the first two years; $9,000 million for the next three years
Effective Tax Rate	24%
WACC	6.73%

General Motors is expected to generate a 3.56% increase in sales in 2021, as per Thomson Reuters. I anticipated that the company will maintain the same growth rate for the next three years. The sales growth narrows to approximately 3% for the last two years after accounting for a drop in sales of gasoline vehicles, although this is likely to be offset to an extent by the growth in sales of EVs. There is a very high probability that the revenue growth rate will be much higher than 3%, especially given the growth prospects of EV sales as well as a potential new source of revenue for GM from licensing its Ultium technology platform. However, I chose to remain conservative after accounting for the possibility that the EV sales growth target may not be met.  

The company has projected its net income in 2021 to be in the range of $6,800-$7,600 million. In line with my conservative approach, I chose the lower end of the range for the first two years. From 2023, the company has projected the net income to grow at 5.94%. I maintained this growth for the next three years. Given that EVs carry a higher margin, there is a very high possibility that the actual net income is going to be much higher, but I decided to maintain the same growth rate as 2023 for the remainder of the model.

The growth rate used to calculate the Terminal Value, was set to 1.5%. I also calculated the Terminal value using a growth rate of 2%.

Although the company has set a target capex of $7,000 million, the company did suggest in its most recent 10-K, that its capital expenditures for 2021 are expected to be in the range of $9,000-$10,000 million. Given the massive outlay required to attain its EV strategy, it is very unlikely that the company will achieve its target capex. Therefore, I assumed a Capex of $10,000 million for the first two years and a Capex of $9,000 million for the next three years.

I assumed the company's effective tax rate to be 24%, which is the value projected by the company for 2021.

Based on these assumptions and using a Weighted Average Cost of Capital (OTC:WACC) of 6.73%, the DCF model yields a share price of $78.73, an approximate 32% upside to the March 19^th closing price of $59.82. 

When the perpetual growth rate is assumed to be 2%, the model yields a share price of $90.65, an approximate 52% upside to the March 19^th closing price. 

Risks

In the short-term, the biggest risk facing the company is the shortage of semiconductor chips, which has affected automobile companies across the world and forced them to idle plants (Toyota and Honda became the latest to announce idling their US factories). The company has announced that it expects the semiconductor supply shortage to have a material impact on its 2021 performance. However, I do not expect this to affect the company’s growth prospects in the long-term.

As mentioned earlier, China, a key market for GM, is expected to announce stricter emission standards. The China 6b standards, set to be implemented in July 2023, is most likely to have an adverse impact on the company’s sales in FY23, especially in the SUV segment. Although the company is expecting an increase in EV sales from 2023 in China to mitigate the stringent regulatory standards, there is the risk that the EV sales may not be able to offset the drop in SUV sales as a result of the standards.

GM continues to struggle with pending legal troubles across the world, which could result in massive cash outflows in the future. They continue to struggle to completely exit the Indian markets, a move made as part of the company’s decision to focus on its profitable markets, and one of their investments is even facing accusations of faking sales numbers.

GM’s pension plan is currently underfunded, and the company anticipates a potential increase in pension funding requirements in the long-term as a result. This development is also more likely to be a massive drag on the company’s finances in the future.

Last but not the least, the discontinuation of LIBOR will be a risk to GM Financial’s ability to manage interest risk effectively until an adequate replacement is found. Given that GM Financial calculates interest payments based on USD-LIBOR, this could become a substantial risk going forward unless adequate replacement is found.

Concluding Thoughts

Despite the risks, General Motors remains a company with far-reaching ambitions to be a dominant EV player. The goal of being an all-electric player by 2035 is definitely attainable given the massive investment plans it has laid out for the next 5 years.

Furthermore, it’s Ultium battery technology is a force to reckon with, not only because it is set to reduce battery costs, but also because the platform, in itself, is unique. The company’s openness to license the Ultium technology to other companies not only demonstrates GM's ambition to dominate all facets of the EV revolution but could actually be CEO Mary Barra’s trump card to dethrone Tesla and be the top dog of the EV industry in the coming years. 

DCF Analysis of the stock yields a target price of $78.73, which suggests a 32% upside to the March 19th closing price. 

The EV mania has already hit the markets. Despite being late to the party, GM looks well positioned to take the chequered flag in the EV race over the coming decade.