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General Motors’ Global Battery Systems Lab in Warren, Mich.
Steve Fecht/General Motors
Like muscle cars revving their engines at a stoplight, shares of
Ford
Motor and
General Motors
finally took off this past week. Long-suffering investors are breathing a sigh of relief, but they shouldn’t take profits just yet. The ride isn’t over.
GM stock (ticker: GM) rose 11% this holiday-shortened week, and Ford shares (F) gained 17%, leaving both stocks up more than 30% year to date. It’s their best start to the year since 1987. What’s all the excitement about? Investors are finally giving these traditional auto makers credit for their electric-vehicle and autonomous-driving investments.
GM kicked things off Tuesday, announcing an investment from
Microsoft
(MSFT) in its Cruise autonomous-driving company that GM bought in 2016. The deal values Cruise at about $30 billion. GM owns roughly 70% of the self-driving company. GM shares rose almost 10% the day of the announcement.
Ford also got a valuation bump from one of its investments. Electric-pickup-truck maker Rivian took in an additional $2.7 billion, valuing the EV start-up at about $28 billion, according to reports. Rivian declined to comment on its private market valuation. Details are a little thin, but the valuation increase for Rivian could have amounted to a whopping $20 billion. Ford owns only 10% to 15% of the company. Still, that’s still roughly $2 to $3 billion in market value. It wasn’t long ago that Ford’s entire market capitalization was only $28 billion.
Wall Street loved both deals.
Deutsche Bank analyst Emmanuel Rosner put both stocks on his Catalyst Buy list—meaning he expects them to soon rise—a day after the announcements partly because he expects more bullish updates from both regarding their EV and AV (short for autonomous vehicle) plans.
Rosner sees more gains for both stocks on the near-term horizon. So does J.P. Morgan analyst Ryan Brinkman. He increased his price target for GM stock to $63 from $49 after the Microsoft investment in Cruise. He rates GM shares Buy.
On Friday, Brinkman upgraded Ford stock to Buy from Hold because of its “incoming tide of hot new products we expect will bring substantial volume, mix, and pricing benefits,” such as the new Mustang Mach-E all-electric crossover vehicle, which just started shipping to customers.
“This is a big deal,” Benchmark analyst Mike Ward told Barron’s, referring to the GM-Microsoft news. His reasoning applies to Ford as well. Barron’s was bullish on Ford in a November 2020 cover story and on GM in this column in August.
The problem for GM and Ford has never been their businesses per se, but how investors perceived those businesses. Yes, they struggle to grow earnings consistently, but investors have been more worried about the existential threat EVs pose and haven’t been convinced traditional auto makers can compete against
Tesla
(TSLA) and other EV start-ups. Tesla, of course, is the world’s most valuable auto maker by a margin equal to roughly three
Toyota Motors
(TM).
The latest moves have started to change that perception. The Microsoft deal “adds to belief that GM is the global leader in this developing technology,” Ward says. Traditional auto makers as tech leaders is a new idea. But it’s an idea which could have the biggest impact on Ford and GM in 2021.
Ford trades for about 11 times estimated 2021 earnings, while GM trades for about nine times. That’s a far cry from the
S&P 500
multiple of more than 20 times. If investors become convinced there is money for both in EVs and AVs, then both valuation multiples could expand.
How high is the question. We aren’t suggesting multiples will balloon to EV-like, or even market-like, levels. But as traditional auto makers talk more about EV and AV investments, perhaps a 30% discount to the market is a reasonable target. That’s roughly 14 or 15 times earnings—where some other slower-than-market growing transportation stocks have traded over time.
Key to seeing sustainable margin expansion will be traction, not talk, from Ford and GM EV launches. That makes the Mustang Mach-E, the Cadillac Lyriq, and the all-electric Hummer really big deals and something investors will have to pay close attention to.
Multiple expansion for auto companies no longer feels like crazy talk. But even if it doesn’t happen, there is still the prospect for improving profit margins as auto sales continue their recovery from pandemic-induced lows. Things are looking up for both GM and Ford.
Read more The Trader:Big Tech Stages a Comeback. A Correction Could Be the Market’s Next Act.
Write to Al Root at allen.root@dowjones.com
