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Future Is Bright for Undervalued GM

Future Is Bright for Undervalued GM

David Whiston: GM's fourth-quarter results were not a massive surprise given that the company had mostly preannounced results in an analyst event in New York in January. Fourth-quarter EPS did end up beating consensus by about $0.21 per share, which was great to see, mostly on strength in North America, from light truck models and GM Financial, which is a really underappreciated asset, I think, in the new GM and continuing to grow, up to pretax earnings of $2 billion over the next couple years.

All that helped to offset some weakness in China. China automotive equity income was down about $200 million year over year as that market does slow, but Cadillac still remains quite strong there. Cadillac globally was the only brand that grew volume year over year globally for GM, in fact.

GM, back at that analyst day in January, did also give 2019 guidance, which was well above consensus at the time. They confirmed that guidance in their quarterly results of EPS of $6.50 to $7 a share. Assuming a steady macro environment, I think 2019 is going to be a really good year for GM and a very transformative year as they continue to squeeze out more cost and realize the scale that new GM should get while growing GM Financial.

The latest initiative is $6 billion free cash flow improvement coming from $4.5 billion in cost improvements and about $1.5 billion in capital expenditure reduction. This will be going across 2019 and 2020.

On the product side you've got new heavy-duty pickup trucks this year and a new Chevy Blazer, and next year you'll have a new generation of full-size SUVs off the pickup truck platform. So that should help mitigate headwinds from things such as another billion dollar headwind in tariff and commodity costs.

Assuming a steady macroeconomic environment, the future for GM still looks pretty bright. A lot more improvements still coming, a lot more scale to realize. The stock on Wednesday did go over $40 at least for a while, and I think it remains an undervalued stock.

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David Whiston

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007.

Before Morningstar, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner. In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011.

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