General Motors Canada. Flickr Image.
General Motors (NYSE:GM) is a leading automaker specializing in the design and manufacture of cars, trucks and SUVs.
GM generates well over $100 billion of sales annually.
As early as in 1Q 2021, General Motors has announced an ambitious plan to accelerate the mass adoption of electric vehicles by introducing the Ultium platform and launching a new portfolio of 30 electric vehicles.
For this reason, the company’s stock prices have soared lately, bringing the company’s market cap to more than $80 billion.
GM’s $80 billion market cap was never seen anywhere in the last 6 years from 2015 to 2021.
When this article was published, GM’s market capitalization was closing in on $90 billion.
Is GM really worth this much? Let’s take a look.
In this article, we will look at GM’s stock valuation from the perspective of 6 ratios.
These ratios are market capitalization to revenue or sales (price to sales), market cap to total equity (price to book value), market cap to net income, market cap to free cash flow (price to free cash flow), market cap to automotive free cash flow and market cap to adjusted earnings before interest and tax (price to EBIT).
We will track these ratios over multiple years and find out how far the current valuations have grown with respect to their historical valuations.
Let’s dive in!
GM’s Market Capitalization
GM market capitalization
* Makret cap data comes from author’s own calculation.
* Market cap is calculated using the weekly and adjusted close price for splits.
Before diving into the ratios, let’s have a quick look at General Motors’ market capitalization which is shown in the chart above for the period from 2015 to 2021.
Based on the chart above, GM’s market cap averaged around $50 billion in the past but has soared in recent months to more than $80 billion.
As of March 2021, GM’s market cap hovered around $85 billion, the highest level the company has ever achieved.
Just about a year ago in March, GM’s market cap tumbled to less than $30 billion when the COVID-19 pandemic has just started.
Before long, the company’s market cap recovered steadily and charged towards its new high in 2021.
In a period of only a year, GM’s stock price has grown more than 300%, bringing the company’s market cap to its current level of $85 billion.
What has caused GM’s stock prices to soar in recent months?
There are multiple reasons that may have caused GM’s stock price to reach a record high as of March 2021.
The following are some of my best guesses.
First, GM has announced a bold plan to go fully electric by the next decade.
In the respective plan, GM expects that 40% of new vehicles produced and sold in the U.S. will be in full battery electric vehicles by the end of 2025.
Investors probably like the idea of GM going after the electric vehicles market for growth.
Secondly, GM’s sales revenue has already recovered to its pre-pandemic level as of 4Q 2020.
Aside from sales revenue, other metrics such as GM’s operating income and the free cash flow as well as the retail sales have also recovered to their pre-pandemic level as of 2020 Q4.
GM’s free cash flow, in particular, has even exceeded that of its pre-pandemic level in Q4 2020, indicating that the company’s vehicle sales have not only recovered but also thrived in the age of the COVID-19 pandemic.
GM’s surging vehicle sales during the COVID-19 pandemic have probably caught investors off-guard, causing the company’s stock price to be undervalued for some time prior to 2021.
When investors realized that the automotive segment wasn’t as bad as they had anticipated, they rushed back to buying GM’s stock, which directly led to the surge in the company’s stock price and the market capitalization.
GM’s Market Cap to Revenue Ratio
GM market cap to sales ratio
* Ratio comes from author’s own calculation.
* Ratio is calculated using the weekly and adjusted close price for splits.
* Revenue used in ratio is on a trailing 12-month or 4-quarter basis.
Let’s first look at GM’s stock valuation from the perspective of the price to revenue or sales ratio as depicted in the chart above.
As seen in the chart, GM’s price to sales ratio has steadily grown from 0.30 in 2016 to around 0.4 in 2019.
Subsequently, the price to sales ratio plummeted to only 0.20 in 1Q 2020, the lowest since 2016, at the onset of the COVID-19 outbreak.
GM’s price to revenue ratio recovered to 0.3 in 2Q 2020 and stayed in this range until 3Q 2020 before it finally broke the 0.4 thresholds in the 4th quarter of 2020.
Since then, the ratio has continued to grow and reached its record high at 0.70 as of March 2021 in tandem with the growth of the company’s market cap.
GM’s Market Cap to Book Value Ratio
GM market cap to book value ratio
* Ratio comes from author’s own calculation.
* Ratio is calculated using the weekly and adjusted close price for splits.
* Book value or total equity value is extracted directly from GM’s quarterly and annual statements.
Another GM’s stock valuation ratio that is worth checking out is the price over book value ratio.
The chart above depicts GM’s price to equity or book values for the period between 2015 and 2021.
In the past, GM’s price to book value was historically around 1.2 before it plunged 50% to only 0.6 in March 2020.
At this ratio, GM’s market capitalization was traded below the equity or book value of the company.
Nevertheless, GM’s stock price quickly recovered from March 2020’s low and charged towards its new high at 1.6 as of March 2021.
With respect to the company’s equity or book value, GM’s stock price is now traded at its historical high.
GM’s Market Cap to Net Income Ratio
GM market cap to profit ratio
* Ratio comes from author’s own calculation.
* Ratio is calculated using the weekly and adjusted close price for splits.
* Net income is GAAP based, attributable to common stockholders and is taken directly from GM’s quarterly and annual statements.
* Net income used in ratio is on a trailing 12-month or 4-quarter basis.
The price to net income or net profit ratio is another valuation ratio that is worth taking a look at.
For your information, the net profit or net income is the final profit available to common stockholders.
Additionally, the net profit in the chart has accounted for GM’s total costs of doing business, including costs of goods sold, operating costs, R&D and SGA as well as tax and interest expenses.
Based on the chart above, GM’s valuation relative to net income has not dramatically changed in the past except during 2018 when the company reported a loss of nearly $4 billion in FY2017.
The huge loss in 2017 has caused GM’s valuation relative to the net income in 2018 to tumble to the negative territories as seen in the chart above.
Nonetheless, GM’s valuation recovered in 2019 when it was back to profitability.
GM’s price to net income ratio averaged around 6.0 in 2019.
During the early pandemic outbreak in 2020, GM’s TTM net income has fallen quite dramatically.
As a result, the company’s price to net income ratio has soared beyond 30.0 in 3Q 2020.
However, GM’s TTM net income started to improve dramatically in later quarters and this has resulted in the decline of the ratio by the end of 2020.
While GM’s market cap has risen significantly during 4Q 2020 and 1Q 2021, the respective price to net income ratio did not follow suit.
In fact, the price to net income ratio has declined in the same period and reached around 14.0 as of March 2021.
The trend shows that GM’s profitability or net income actually has risen from a TTM perspective, leading to the decline of the ratio.
GM’s Market Cap to Free Cash Flow Ratio
GM market cap to free cash flow ratio
* Ratio comes from author’s own calculation.
* Ratio is calculated using the weekly and adjusted close price for splits.
* Free cash flow is GAAP based, and is calculated using operating net cash and capital expenditures extracted directly from GM’s quarterly and annual statements.
* Free cash flow used in ratio is on a trailing 12-month or 4-quarter basis.
Since cash is the lifeline of a business, we will also look at GM’s market valuation with respect to free cash flow which is shown in the chart above for the period from 2016 to 2020.
For your information, free cash flow is defined as the operating cash flow minus the capital expenditures.
According to the chart, GM’s price to free cash flow ratio was quite similar to the trend observed in the price to net income ratio.
The price over free cash flow soared in 3Q 2020, illustrating the sinking free cash flow at the start of the COVID-19 outbreak.
While the COVID-19 has started early in 2020, GM has only felt the negative effect of the outbreak in 3Q 2020, and hence, the soaring price to free cash flow ratio in the same period.
However, GM’s free cash flow generation improved dramatically in subsequent quarters.
Following the improvement, GM’s price to free cash flow ratio started to decline by the end of 2020.
As of March 2021, the ratio reached its pre-pandemic level of around 8.0.
The downtrend of the price over free cash flow ratio points to GM’s powerful free cash flow generation even in the age of the COVID-19.
Keep in mind that GM’s market cap actually has continued to grow during the same period.
The rising market cap has not resulted in the rising of the price to free cash flow ratio.
All of this was possible as a result of GM’s strong free cash flow generation.
Additionally, you may notice that GM’s stock was traded at less than 5 times the free cash flow in 2Q 2020, the lowest level since 2016.
GM’s Market Cap to Adjusted Automotive Free Cash Flow Ratio
GM market cap to automotive free cash flow ratio
* Ratio comes from author’s own calculation.
* Ratio is calculated using the weekly and adjusted close price for splits.
* Adjusted automotive free cash flow is a non-GAAP figure, and is based directly on GM’s own adjustment as seen in its quarterly and annual statements.
* Adjusted automotive free cash flow used in ratio is on a trailing 12-month or 4-quarter basis.
While the price to free cash flow ratio evaluates GM’s total free cash flow as a whole, the adjusted automotive free cash flow evaluates only the net cash from GM’s automotive segment.
GM’s automotive free cash flow may not be as strong as its GAAP free cash flow.
This trend can be seen from the higher ratio as depicted in the chart above.
On average, GM’s price to adjusted automotive free cash flow ratio hovered around 15.0 in the past as opposed to 8.0 for its GAAP counterpart.
Over the chart, GM’s ratio has gone to the negative regions at the end of 2020, indicating the negative automotive free cash flow.
The price to adjusted automotive free cash flow ratio was back to the positive region in March 2021 at around 30.0.
The positive ratio points to GM’s improving automotive free cash flow on a TTM basis.
GM’s Market Cap to Adjusted EBIT
GM market cap to adjusted earnings ratio
* Ratio comes from author’s own calculation.
* Ratio is calculated using the weekly and adjusted close price for splits.
* Adjusted EBIT is a non-GAAP figure, and is based directly on GM’s own adjustment as seen in its quarterly and annual statements.
* Adjusted EBIT used in ratio is on a trailing 12-month or 4-quarter basis.
The last ratio that evaluates General Motors’ stock valuation is the price to adjusted EBIT or earnings before interest and tax ratio which is shown in the above chart.
The adjusted EBIT is based on GM’s management adjusted earnings and is a non-GAAP figure.
According to GM’s management, the EBIT was adjusted to only measure the company’s core operations and it excludes all non-core items such as impairment charges, exit costs resulting from a strategic shift in operation, cost arising from recall and other related legal matters, etc.
Keep in mind that the adjusted EBIT also reflects GM’s profitability based on the company core items.
All told, we can see that GM’s stock valuation relative to the adjusted EBIT has been quite steady at around 4.0 from 2016 to 2019.
Between 2016 and 2019, GM’s stock has been trading at about 4 times the adjusted EBIT.
However, the ratio started to fluctuate dramatically during 1Q 2020 and began to rise significantly to 14.0 at the end of 2020.
As of March 2021, GM’s price to EBIT ratio came down to around 8.0.
At this ratio, GM’s valuation was about 8 times its adjusted EBIT, which was slightly on the high side considering that its historical value was averaged at 4.0.
The trend observed in the price to EBIT ratio was also similar to that of the price to net income and free cash flow ratio.
The sinking ratio indicates GM’s improving EBIT on a TTM basis.
Again, GM’s market cap actually has soared during the same period between the end of 2020 and early 2021.
However, the price over EBIT ratio was in reverse in the same period, suggesting GM’s improving profitability and the adjusted EBIT.
Conclusion
GM’s market valuation was at an all-time high at $85 billion as of March 2021 as a result of its record stock price.
At this valuation, GM’s stock was traded at 0.70 times of sales, and about 1.7 times of its net worth (book value).
With respect to net income, GM’s stock was about 10 times the profitability figure, which was slightly on the high side.
As of March 2021, GM’s stock valuation was traded at 7.0 times its TTM free cash flow, which was in line with its historical valuation.
When we evaluate only GM’s core items as shown in the adjusted EBIT, GM’s valuation was slightly on the high side compared to its historical value.
My take is that GM’s stock valuation is neither cheap nor expensive at the current stock price.
The reason is that GM’s core earnings and net income have been weakening as seen from the increasing ratio.
However, GM has a very strong free cash flow generation as seen from the low price to free cash flow ratio.
In short, if you believe free cash flow is what will determine GM’s stock valuation going forward, GM’s stock is a buy at the current price.
References and Credits
1. All financial figures in this article were obtained and referenced from GM’s quarterly and annual statements which can be found in GM earnings releases and presentations.
2. Ratios are calculated by the author.
3. Featured images were used under Creative Common License and obtained from marc falardeau and Can Pac Swire.
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