Buy Into GM’s (NYSE:GM) China-led Recovery

GM Returns To Growth In China

I’ve been hearing more and more chatter about a China-led recovery and its time to take notice. Automobile sales, among other indicators, have been steadily rising since hitting the COVID-induced bottom and show no signs of slowing down. If we assume a similar situation in our own economy the next 12 to 18 months could be really interesting. Looking at the data, there are pockets of weakness with the economy, sectors, and industries that may never fully recover, but the broader evidence supports a strong, sustained increase in activity that will only be fueled by another round of government stimulus.

Back to GM (NYSE:GM). GM reported sales in China grew 12.0% during the three months ended September 2020. This marks the 1st quarter of growth in the region since 2018 and could mark an important turning point. GM is China’s second-largest automobile manufacturing by units sold and eager to take on more market share. On a brand basis, the premium Cadillac brand saw sales jump 28% while the mass-market Buick and Wuling brands a slightly more-modest 26% each. The Chevy and Baojun brands both declined by about 20%.

Back In The USA, GM Sales Outperform Consensus

Meanwhile, back in the USA, GM’s sales point to a stronger than expected auto market as well. The company reports that sales fell 10% in the third quarter but topped the consensus by more than 400 basis points. The 665,192 units reported will surely drive a revenue and earnings beat but by how much depends on the mix. On a segment basis, the Chevrolet, Cadillac brands, along with the Envision line-up of SUVs, all saw 45% growth.

Kurt McNeil, GM vice president, U.S. Sales Operations said, “Industry-wide, dealers are selling a high mix of large pickups as the summer comes to an end. Our strong large pickup and all-new full-size SUV lineups from Chevrolet and GMC are selling extremely fast.”

"While the economy has made a substantial rebound in the third quarter, retail auto sales have been even more resilient,” said GM Chief Economist Elaine Buckberg. “Super low auto loan interest rates have boosted retail auto sales; yet more strength comes from pandemic-induced demand.”

GM Is Positioning For EV, Get Ready

General Motors is perhaps the most aggressive of the major automakers when it comes to EV and electric vehicles. The company says it is on a path to 100% electric that includes a number of top-selling brands available today. The current lineup should soon total 12 models with a promised-20 (in the U.S.) by 2023. Looking to China, GM wants EV to represent 40% of its lineup within the next five years. Other deals that position the company well for the EV and, more importantly, the EV mass-market, are partnerships with Nikola and Lordstown Motors. Both of these companies make consumer-focused electric pickup trucks intended to compete with the F-150 and Sierra lines of trucks.

GM Is A Bargain, It’s Growing, And There’s An Expectation For Upside

GM is a bargain when trading near $32.50 as it is now. At this level, it is only 12X this year’s earnings and 7X next year’s EPS consensus with a favorable outlook. Assuming that the analyst’s consensus is too low, and there is reason to believe that is so, the valuation is even better.

The analysts are mostly bullish, a few of the 18 current ratings are still neutral, and there is upside in the consensus outlook. The consensus price target is near $40 which implies a 23% upside. Looking at the chart, a move to $40 looks entirely possible within the next two quarters. A better-than-expected earnings report with positive guidance will go a long way toward making that happen. GM reports earings on November, 5^th.