Could GM Really Be Worth Almost 50 Percent More?

2015 Impala
Source: General Motors Co.
General Motors Co. (NYSE: GM) is in a very strong position looking to the future. The company has open avenues to pursue both domestically and in China. With this position, and with sales ramping up, analysts have taken notice and given their two cents on where this auto giant can go from here.

Argus reiterated a Buy rating with a $45 price target, implying a 42.5% upside from current prices. The firm also maintained its 2016 EPS estimate of $5.20, which assumes slightly stronger sales growth in Europe, market share gains, and higher gross and operating margins. The estimate implies growth of 14% from 2015. The 2016 consensus forecast is $4.96.

One of the catalysts for this rating was GM’s second quarter earnings of $1.29 per diluted share, up from $0.58 a year earlier. EPS topped Argus’ estimate of $1.20 and the consensus estimate of $1.08. The better-than-expected results reflected favorable pricing in Europe and higher margins in North America and China.

It came down to the fact that GM grew earnings for a fifth straight year in 2014 and, in the firm’s view, is poised to continue this performance in 2015. In particular, Argus expects GM to benefit from recent efforts to rationalize manufacturing capacity and consolidate vehicle platforms, as well as from strong U.S. demand for new vehicles.

Also worth noting is that GM has renewed or replaced nearly all of its vehicle models since emerging from bankruptcy in 2009, and that its new vehicles have gained broad consumer acceptance. Many models, including the Corvette, Cadillac, and Cruze, are also considered to be the best in their respective product categories.

Despite GM’s management not providing detailed revenue or earnings guidance, Argus expects GM to be profitable in 2015 in all geographic regions and to boost North American margins by 2016. It is also targeting overall profit margins of 9% to 10% by early next decade, excluding the impact of recalls, up from approximately 6% in 2014. In addition, GM plans to boost capital spending this year by 20%, to about $9 billion. It expects new and updated models to account for more than a quarter of vehicle sales next year and for nearly half of sales by 2019.

Although sales weakness in Europe hurt earnings in 2014, GM expects a profit in Europe by 2016, driven by improving sales of new vehicles and recent restructuring efforts. GM also holds a leading market share in the BRIC markets (Brazil, Russia, India, and China). Argus views emerging markets as key long-term growth drivers for the auto industry, and expect GM to benefit from its strong presence in these markets.

Shares of GM were up 1.7% at $31.59 on Tuesday morning. The stock has a consensus analyst price target of $39.93 and a 52-week trading range of $28.82 to $38.99.