Morgan Stanley analyst Adam Jonas reiterated an Overweight rating on the shares of General Motors Company GM and lowered the price target from $41 to $40.
The automaker reported third-quarter FY23 sales growth of 5.4% year-on-year to $44.13 billion, beating the analyst consensus estimate of $43.68 billion. Adjusted EPS of $2.28 beat the estimate of $1.88.
The results, the analyst says, are further evidence of the resiliency of the core internal combustion engine (ICE) light truck business, driving better-than-expected results and nearly $5 billion of free cash flow in the quarter.
The analyst writes demand for ICE vehicles will continue to surprise positively vs. consensus expectations over the next 12 months.
Also, the de-adoption of ICE in GM's core North American market will be much more gradual than the market expects, notes the analyst.
The analyst says the discounted free cash flows generated by the GM ICE franchise can account for as much as 2x the current market cap of the company.
According to the analyst, GM made the biggest financial and strategic commitment to EVs amongst the major OEMs and targets the sale of only vehicles with no tailpipe emissions by 2035.
The powertrain architecture Ultium has faced execution challenges, adds the analyst.
While the EV business profit data is not expected to be out until the March 2024 investor day, the analyst expects Adj. EBIT margins to be between -50% and -100%.
The analyst expects to see many of GM's competitors partner with their Chinese associates and other larger scale EV leaders to develop new architectural and platform standards for connected and electric vehicles.
Hence, the economic payback of the Ultium strategy is not clear, writes the analyst.
With respect to GM's autonomous vehicle business, Cruise, execution of the go-to-market strategy continues to face huge challenges as seen by the recent order from the California DMV to pause driverless operations in San Francisco.
The analyst concludes by saying that expectations are quite low with respect to GM's ability to generate positive economic value from its current investment strategy in EVs and AVs.
Price Action: GM shares are trading lower by 3.61% at $27.52 on the last check Friday.
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