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General Motors Global Battery Systems Lab in Warren, Mich.
Steve Fecht / General Motors
Like muscle cars renewing their engines at a stop, sections of
Ford
Motor and
General motors
finally last week. Investors who have long suffered a respite, but should not take profits yet. The journey is not over.
GM stock (ticker: GM) rose 11% this week on holiday shorts, while Ford (F) shares gained 17%, leaving both stocks up more than 30% year to date. This is their best start to the year since 1987. What is this about? Investors are finally giving credit to these traditional carmakers for their electric and automotive vehicle investments.
GM kicked things off Tuesday, announcing an investment from
Microsoft
(MSFT) in its Cruise autonomous driving company that bought GM in 2016. The deal puts Cruise valued at about $ 30 billion. GM owns about 70% of the self-driving company. GM shares rose nearly 10% on the day of the announcement.
Ford also received a valuation lump sum from one of its investments. Rivian electric truck maker raised an additional $ 2.7 billion, valuing the EV startup at about $ 28 billion, according to reports. Rivian declined to consider its private market valuation. Details are a bit thin, but the valuation increase for Rivian could have been at the $ 20 billion level. Ford owns only 10% to 15% of the company. However, that is still around $ 2 to $ 3 billion in market value. Ford’s total market capitalization was only $ 28 billion.
Both contracts were highly regarded by Wall Street.
Deutsche Bank analyst Emmanuel Rosner placed both stocks on his Catalist Buy list – meaning he expects them to rise soon – a day after the announcement was partly due to the expectation of more bullish updates from the both in terms of their EV and AV plans (short for autonomous vehicle).
Rosner sees more gains for both stocks on the horizon near term. So is Ryan Brinkman, JP Morgan analyst. It increased its price target for GM stock to $ 63 from $ 49 after Microsoft ‘s investment in Cruise. It rates GM shares Buy.
On Friday, Brinkman upgraded Ford stock to Buy from Hold because of “the incoming tide of hot new products that we expect to bring huge benefits, mix, and prices,” such as the crossover vehicle new electronic Mustang Mach-E, which has just started delivering to customers.
“This is a big deal,” said benchmark analyst Mike Ward Barron’s, citing the GM-Microsoft news. His reasoning applies to Ford as well. Barron’s Ford was bullish in the November 2020 cover story and GM in this August column.
The problem for GM and Ford was never their own businesses, but how investors viewed those businesses. Yes, they are struggling to grow earnings consistently, but investors have become more concerned about the risk from EVs and have not believed that traditional carmakers can compete. the face
Tesla
(TSLA) and other EV starts. Tesla is, in fact, the most valuable auto maker in the world with a margin equal to about three
Toyota Motors
(TM).
Recent trends have begun to change that perspective. Microsoft’s contract “adds to the idea that GM is the world leader in this development technology,” Ward says. Traditional auto makers are a new idea as tech leaders. But it’s an idea that could have the biggest impact on Ford and GM in 2021.
Ford traded for about 11 hours estimating 2021 earnings, and GM trades for about nine hours. That’s a far cry from
S&P 500
multiple of more than 20 hours. If investors are sure that there is money for both EVs and AVs, both valuations could expand.
How high is the question. We do not recommend that balloon multiples bring to levels similar to EV, or even market-like. But as traditional auto makers talk more about EV and AV investments, a 30% discount to the market may be a reasonable target. That’s about 14 or 15 times as much earnings – where some other transport stock that is slowing down the market has traded over time.
Traction from launch is a steady margin extension, not to mention, from Ford and GM EV shows. That makes the Mustang Mach-E, the Cadillac Lyriq, and the all-electronic Hummer contracts huge and something that investors need to pay close attention to.
Multiple extensions for automotive companies no longer feel like clever talk. But even if it doesn’t happen, profit margins are still expected to improve as car sales continue to recover from low levels caused by pandemics. Things are looking for both GM and Ford.
Read more The Dealer:Big Tech keeps track of back. Correction could be the next Market Act.
Write to Al Root at [email protected]