Value stocks are shares in companies that trade at low multiples compared with their earnings and future potential. While General Motors (GM -0.05%) faces near-term challenges from the chip shortage, its massive investments in electric vehicle technology could leave long-term investors smiling all the way to the bank.
What's behind the recent underperformance?
GM's shares are down by around 24% from their 52-week high of $64 as investors assess the impacts of the industrywide chip shortage, which has led the company to announce plans to slash production at eight of its North American assembly plants in September.
But management is also taking steps to sustain its operations during this challenging time.
Image source: Getty Images.
According to CEO Mary Barra, GM's engineers are helping keep production capacity as high as possible by using chips that are more readily available and identifying alternatives that can replace semiconductors. These efforts have helped GM maximize the production of its highest-demand vehicles.
Second-quarter revenue soared by 104% year over year to $34.2 billion, helped by favorable comps against pandemic-hit 2020.
GM is using its manufacturing constraints as an opportunity to prioritize more profitable segments like pickup trucks and SUVs, which helped it earn adjusted earnings before interest and taxes (EBIT) of $4.1 billion -- up from adjusted EBIT losses of $536 million in the prior-year period. Management expects adjusted earnings per share of $5.40 to $6.40 in full-year 2021, which is an improvement from the $4.82 per share it earned in 2019, before the pandemic.
Keep your eyes on the prize
GM expects healthy profits in 2021, despite the chip shortage, which suggests the stock's sell-off could be overblown. That said, it is unclear when the crisis will end -- with some analysts predicting it could last until 2023 because of manufacturing disruption from the delta variant. So investors should pay attention to GM's long-term thesis for success, which will depend on green technology.
Analysts at Wedbush Securities believe EVs will represent 10% of automobile sales by 2025. GM plans to launch 30 new electric models by then, and its vast logistics network and scale will give it a big advantage. The company is already taking advantage of this, announcing plans to retrofit one Detroit plant into a dedicated electric vehicle assembly facility called Factory ZERO.
GM's mobility subsidiary, BrightDrop, is another long-term growth driver. The business focuses on electric last-mile delivery products such as moving pallets, delivery vans, and logistics software.
Management expects e-commerce adoption to push the U.S. market for delivery logistics solutions to $850 billion by 2025. And while it's too early to project BrightDrop's future market share, the venture is exciting because it shows GM's potential to transition from a legacy automaker into a diversified green technology company -- much like its rival Tesla.
The big reevaluation?
Trading for just seven times forward earnings, GM is dirt cheap compared with Tesla -- the market leader in EVs and related tech, which boasts a forward P/E ratio of 108. As GM's EV and green tech business scale up, the market could reevaluate what its stock is worth. And now is a great time to get in on the ground floor of this epic transformation.
