Published on June 27th, 2020 | by Frugal Moogal0
Is GM’s ICE Business Worthless? Adam Jonas Seems To Say So
June 27th, 2020 by Frugal Moogal
Steve Hanley beat me to writing an article about the advice auto analyst Adam Jonas released last week in which he advised his clients that GM’s electric car business made it a $100 billion company. Steve’s article does a great job touching on what Adam’s argument was, and should be read first to really get the rest of this one.
In my recent article on Nikola’s stock price and what it should tell us, I was accused of writing an article but not providing enough “analysis” by one of the commenters. I bring this up because if you’re looking for me to dive into deep technical analysis, that has not been my investing strategy … well, ever. Instead, I value stock based on a set of criteria that I look at in companies, and it doesn’t use a lot of the metrics that someone like an Adam Jonas may use to charge his clients money for his opinions, but it’s worked for me. I wrote an article about my theory a while ago. You can read it here if you’d like.
You might not agree that this is the best way to examine a stock, and as I always try to remind people in my disclaimer, if you’re only using one opinion, you probably shouldn’t be investing. I like to find voices that are bullish and bearish on a company, look at my criteria, and go from there. If you don’t agree, that’s great! It makes the world a lot less boring!
Criteria I Don’t Use (And Why)
When I find analysis that seems to be wildly different than my previous belief on a company, I like to use the criteria that I use to invest, and see how it compares to what I believe. I pretty much ignore things like trading support and resistance bands, as well as trend lines for share price, believing instead that if the following information is proven over time, those indicators will take care of themselves.
I also hate price targets. If you missed it (or forgot about it), Adam Jonas made quite a stir in May of 2019 when he stated that Tesla could drop to $10 in a worst case scenario. At the same time, and less attention getting, his May 2019 price target for Tesla was $230 and his bull-case was $391.
When your bull case is 39.1× the price of your bear case, I don’t think your analysis is very valuable. This would be like me today saying that my bear case for Tesla right now is $200, and my bull case is $7,820. I bet that if you look back at this in a year, I’ll be closer to correct than Jonas was.
For the record, using the date of the article above, one year later, on May 21, 2020, Tesla closed at $827.60 a share, or more than double what Jonas claimed as his bull price for the stock.
This isn’t to say that I think that Jonas isn’t a decent analyst. What I think is that he doesn’t understand the electric vehicle revolution can’t be valued by traditional metrics. Amazon is not valued using the same metrics that we used for Sears. Tesla should not be valued using the same metrics that we have used for GM.
Unfortunately, I worry that Jonas has now concluded that GM should be valued like Tesla, and that isn’t the case either.
With all of that being said, now let’s look at GM using my criteria, and at the end, I’ll tell you what I think.
GM Using Frugal Moogal’s Criteria
(These are the same criteria that I laid out in the earlier article I mentioned before.)
- Company Leadership — You can see the entire executive lineup at GM here. The most visible is CEO Mary Barra, and she tends to talk a good game. Her profile states that she envisions a world with zero crashes, zero emissions, and zero congestion. The problem I have is since she took the reins of the company in December of 2013, I have seen little actual action from GM to achieve any of that. In January of this year, GM announced they plan to convert their Hamtramck plant to an electric vehicle production facility, with production beginning late 2021 — a date which they have since said may be pushed back further due to COVID. Eight years to convert one of GM’s dozens of factories to EV production? I’m not impressed. And no, I don’t even consider the Bolt — which sells in one quarter less than Tesla sells in one week — as anything. To me, GM’s leadership is slow and ineffectual.
- Executive Pay — In 2019, Barra was paid a $2.1 million base salary and received a $2.7 million bonus. I generally exclude stock-based compensation so long as it is based on the performance of the company, but with the stock price being nearly flat for the year, and Barra presiding over a 40-day strike that cost the company more than $3 billion, I don’t understand how a $12.1 million stock award can be justified. If the investor isn’t making money with the CEO, it doesn’t make sense. This is another strategy at GM that I find nonsensical, although one perhaps Jonas overlooks as this sort of compensation package seems to be the norm in a lot of these “established” companies.
- No Stock Buybacks — In March of 2015, GM created a program to repurchase up to $14 billion worth of the company’s shares. GM actively repurchased in that time $10.6 billion of its shares. My belief, strongly, is that share buybacks are only good for weak companies that are trying to prop up their share price. If I look at the share buybacks compared to the market cap of the company, and I am generous by only looking at the program until 2018 when it was halted, it essentially kept their share price flat. Imagine what would have happened if Barra instead used the money to accelerate GM’s supposed “zero crashes, zero emissions, zero congestion” plan above. The $10.6 billion could have been used to convert 4 factories to electric vehicle production, with almost $2 billion left over. This was a horrendous waste of capital to appease investors who were concerned about their investment for the next quarter but not the next 10 years.
- Long-Term Planning — Saying your “zero crashes, zero emissions, zero congestion” slogan sounds nice, but I’d like to see what is actually happening. Turns out, according to production plans, GM plans to produce fewer than 320,000 electric vehicles in 2026. Even worse, that number includes Ford’s production plans, which supposedly includes at least 50,000 Mach-Es a year, so … let’s be nice and say GM is shooting for 300,000 electric vehicles in 2026. The last known production rate for Tesla’s Shanghai factory, that was built in a year, was 3,000 vehicles a week. Tesla Shanghai was reported to cost $2 billion. So, this is GM stating that it can’t create a compelling electric vehicle in the next 6 years. And the market will get more crowded. Tesla is moving ahead with expansion in China and new factories in Germany and the US. Again, this is a failing grade to me.
- Is the Business Future-Proof? — No. Tesla already exists with better products that are easier to maintain and easier to operate. Prices are falling quickly. There is no way for internal combustion to proceed. And, with factories that take longer to convert than it takes for Tesla to build from the ground up, GM is ripe for disruption. Another reason I wouldn’t invest.
- Do I Understand What They Do? — Finally, something I can answer positively! GM designs, manufactures, and sells (to dealers) vehicles and parts for their vehicles. I believe if you can’t explain what a business does in a sentence or two, it is probably too complex to invest in. If enough other factors work in GM’s favor, I would find it an interesting target.
- Am I Too Close To Them? — Do I love GM? No. I’ve never owned a GM car personally. To be honest, the thing that most stands out with my experience from GM is when I went to a dealership to test drive a Bolt and the salesperson asked me, “Do you drive anywhere?” before stating that if I did, an electric car was totally impractical. They also told me it needed oil changes and all the “standard” car maintenance, so it would be better to buy a cheaper gas car. I thanked them and told them I’d keep my Tesla reservation since they thought their car sucked. Interactions like this don’t tell the whole story of course, but they are telling. Since I’m not overly close to them, this again works in their favor, but my previous interaction stands out as a bright red flag.
- Invest For The Long Haul — This isn’t so much something I look at a company about, but what I do if I believe in a company. There was a solid video released earlier today by Chicken Genius Singapore on YouTube which highlighted that if you invested $10,000 in 10 different stocks, and nine of them went bankrupt, but one of them compounded by 20% per year for 40 years, you’d end up with $14,697,715.68 from your investment — even with nine other companies going bankrupt! You can watch the video here. (As a note, some people may find Chicken Genius Singapore’s humor to lean toward the adult side.) This is where the business being future proof is really important. If it’s not, eventually, your investment will wane. GM isn’t a company I’d want to hold for 10 years, much less 40. This isn’t to say I don’t regularly review the criteria above in investments, and I have found issues that have caused me to sell certain stocks sooner than I expected, but I want to see a company I expect will be in a better place in 10 years than where they are now, and I sure don’t see that with GM.
I honestly don’t get what Jonas was getting at with his statement at all. If GM’s EV business is worth $100 billion, with GM’s market cap hovering around $35 billion today, doesn’t that mean that GM’s ICE business is worth less than nothing? GM’s current price is $24.46. Jonas’s own price target is $43 a share, meaning that apparently Jonas himself believes that the total value of GM is $60 billion, meaning he apparently believes that the ICE division is a $40 billion drag on value.
I don’t think that was the point he was trying to get at, but I honestly don’t understand what he sees in the company. Maybe it is a “comfort zone” company, a stock that, as an analyst who gets paid to review auto companies, Jonas believes he can make a statement about and have more success than on his recent Tesla calls. I don’t know.
I just don’t get the way Jonas thinks here. He stated Tesla is overvalued, and put a value of $650/share on it. This — still way above his best bull case from last year — would put Tesla’s market cap at $120.5 billion, meaning that Jonas only sees a $20 billion premium on Tesla’s company, even though Tesla has electric vehicle manufacturing capacity around double today what GM expects to have in 2026.
If we pretend that Tesla has no structural advantages over GM today, just based on manufacturing capacity, if Jonas is arguing that GM’s EV division should be worth $100 billion alone, using that same logic, Tesla’s stock must be ridiculously undervalued. By taking that logic, Jonas is saying that GM’s electric vehicle division is worth $333,333 per unit of capacity … in 2026.
Using that same data, let’s pretend that by 2026 Tesla only has four factories. Let’s say that Fremont’s capacity doesn’t increase at all, and it remains at an annualized run rate of 400,000 per year. Let’s say that the new China, Germany, and US factories only manage 200,000 per year. That would give us total production capacity of one million units in 2026.
Applying the $333,333 per unit of capacity that Jonas is apparently claiming GM’s electric vehicle division is currently worth, that gives me a market cap for Tesla of $333.33 billion, or 87% higher than it is today. Using that logic, shouldn’t Jonas have a bull case for Tesla right now of $1,797 per share, or roughly the same value that he gives GM’s efforts?
(I will note with a smirk, using the ridiculous 39.1× range Jonas used in his 2019 note, a $1,797 share price falls nicely between my bear case of $200 a share and bull case of $7,820 a share I mentioned before. Morgan Stanley, here I come!)
Okay, my conclusion got long, so here’s a conclusion to my conclusions. Here are my takeaways:
- I see no world in which any sensible investor sees GM’s electric vehicle division as being worth $100 billion, even if it is valued as a “tech company” or whatever nonsense Jonas or anyone else wants to use for it.
- GM continues to show almost no tangible evidence of a move toward actually redefining itself with its “zero accident, zero emissions, zero congestion” mantra. GM’s massive stock buybacks and minimal future production plans instead reveal a company that really doesn’t have strong leadership to make the fundamental shift toward the future that is needed.
- Using his price points, either Adam Jonas believes that GM’s ICE vehicle business is beyond worthless, or he can’t do math. Or both. And I honestly don’t believe either other those, so I’m just stumped here as to what point he was trying to make.
- I don’t understand why people pay for analysis like the one I’m talking about here.
- If you’ve read my articles for a while, you know I don’t set price points, but if you want to use my bear case of $200 and bull case of $7,820 and check in where the stock is in an year, I feel relatively confident we’ll be in that range. (If I’m off by more than double on the bull side, by the way, as a shareholder, I will gladly eat crow.)
I probably learned even more, but this is a crazy long article, so if you read this far, kudos to you. Honestly, I haven’t dove through GM’s finances in this much detail for a year or so, so I found this interesting and sort of just kept writing as I went. I feel like the story is the same as before, however — GM is talking a big game, and doing nothing to actually move forward.
The way I analyze things, a voice like Jonas is important for me to check my own beliefs about. If you believe that I’m wrong, Jonas is right, and GM’s electric vehicle division should be valued at $100 billion, please leave a comment below! If there is enough that I’m overlooking or missed, I’ll write a followup article exploring this more. And yes, I do know that GM plans to partner with Honda — to me, that doesn’t change anything.
I’d love to be wrong. We could use another company or two actually pushing the electric vehicle revolution further faster. I just don’t think based on its recent past that GM is going to be the one to do it.
I am a Tesla [NASDAQ:TSLA] shareholder who has purchased shares within the preceding 12 months. I am not currently a GM [NYSE:GM] shareholder, nor do I intend to initiate a position in GM at any time soon. (I feel compelled to add I do not support shorting stocks, and won’t be doing that either.) Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article is published in which I discuss matters that I feel may materially affect stock price. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.
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