While market experts love to repeat the mantra that electric vehicles are the future, investors ought to consider “hybrid” ideas such as General Motors (NYSE:GM). To be fair, GM stock doesn’t generate the excitement of, say, Tesla (NASDAQ:TSLA) or another EV-only enterprise. However, economic realities dictate that combustion-powered cars still have a place in the broader mobility ecosystem. I am bullish on GM.
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On paper, EVs beat out their combustion counterparts in many categories. Fundamentally, they’re less expensive to charge, making them attractive as the price of crude oil rises. In addition, as zero-emission platforms, EVs align with contemporary social sensibilities. Also, for many, the whisper-quiet ride represents an attractive selling point.
To that end, General Motors provides several compelling options. Most intriguingly, management decided to electrify the company’s most iconic automotive brands, like the Hummer, which should bring a whole new audience to the table. This should be a massive net positive for GM stock.
However, a significant portion of the population will desire traditional forms of mobility. Here too, General Motors provides compelling coverage. As I noted last month, “GM dropped a bombshell when it debuted its eighth-generation Corvette with a mid-engined format – the first in the brand’s history. Naturally, sales demand skyrocketed. Back in June 2021, management stated that it wasn’t even close to keeping up with demand for the new Corvette.”
After several miscues in the past, General Motors is finally firing on all cylinders.
GM Stock Remains Holistically Relevant
Although investors may be quick to dismiss GM stock as a legacy giant lumbering its way to electrification, the framework presents more nuances and complexities. Fundamentally, while EVs bring much excitement to the table, combustion-powered vehicles still remain relevant.
Much of this relevancy centers on cost structures. According to Kelley Blue Book, the average price of a new EV is $62,876. Considering that this data originated early this year, it’s very likely that this price tag increased significantly. Either way, pre-pandemic median household income in the U.S. was $69,560. Though this figure too increased, in real terms, the positive impact (if any) is minimal.
Put another way, not too many households will spend 90% of their gross income on a car, whether the economy is good or bad.
To be fair, rising gasoline prices convinced many people to reconsider EVs, which might put GM stock at a disadvantage over pure-play investments. Indeed, a March report this year by NBC News revealed that a majority of newly interested EV buyers cited lower energy costs as their primary reason for considering going electric.
Still, the challenge for pure-play EV providers is that the addressable market will likely diminish if the Federal Reserve continues on its path of raising interest rates to combat inflation. As broader conditions worsen, many blue-chip technology firms announced or plan to announce major layoffs. That’s not going to help EV firms, which offer a premium on their products.
On the flip side, hybrid legacy automakers, which presently offer both combustion and electric options, may benefit. For households of adequate means, they can provide compelling EV products. For those with more modest income streams, they can provide the more accessible combustion route. Therefore, GM stock deserves a second look.
Quantitative Data Bolsters General Motors
On a financial basis, GM stock should also garner special attention. While so many pure-play EV stocks represent high-risk wagers, General Motors is a well-known entity. In addition, the business looks undervalued, arguably significantly so.
For instance, Wall Street currently prices GM stock at 6.7x times trailing-12-month (TTM) earnings. In contrast, the automotive sector median price/earnings ratio stands at 16.6x. As well, GM trades at 6.6x forward earnings for 2023. On the other hand, the industry median forward P/E ratio is slightly over 10x.
That’s not to say that GM stock doesn’t have challenges – because it does. For instance, the underlying company’s three-year revenue growth rate (on a per-share basis) is -5.6%. Unfortunately, because of the COVID-19 crisis, the automotive sector suffered substantially from global supply-chain disruptions, a headwind from which the industry is just now recovering from.
However, General Motors also enjoys operating and net margins of 6.27% and 6.57%, respectively. Both stats rank better than at least 62% of the competition, making GM stock a viable market idea despite obstacles.
Finally, the automaker features a return on equity of 15.85%. For comparison, the industry median ROE is only 5.96%, implying that GM is a high-quality business.
Is GM a Good Stock to Buy, According to Analysts?
Turning to Wall Street, GM stock has a Moderate Buy consensus rating based on eight Buys, five Holds, and two Sell ratings. The average GM price target is $46.54, implying 17.05% upside potential.
Credibility Matters
Although it’s natural for investors to want to dive head first into the EV space, a measured approach may be wiser. Though EV sales continue to rise, they still represent a minority in terms of all cars on the road. Until economic conditions support a full transition, combustion-powered cars will still be relevant for many years to come. Thus, GM stock enables investors to profit from both market segments.
