Morgan Stanley Thinks General Motors (GM) Can Remain Relevant and Profitable; Analyst Raises Rating to 'Overweight'
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(Updated - September 19, 2016 10:09 AM EDT)
Morgan Stanley upgraded General Motors (NYSE: GM) from Equalweight to Overweight with a price target of $37.00 (from $29.00). Analyst Adam Jonas thinks General Motors can remain relevant and profitable for longer than the market thinks, and he sees above consensus performance over the next three years.
"Following a very significant 2Q earnings beat, we have conducted a more detailed reassessment of our GM earnings forecasts. We believe earnings can be flat in 2017 and 2018. If that happens, the market likely will be positively surprised," said Jonas. "While implying only about 5% upside to consensus, we believe even stable earnings through 2018 would demonstrate a material inflection that could drive both further FCF generation and the share price."
Discussing his views on a longer industry cycle, the analyst said, "With all the excitement around fully autonomous transport, we believe investors may be overlooking the steps and the time required to get there. Regarding the now well understood ´peak auto´ thesis, we think investors may be underestimating how long this cycle can last and the related levels of mix and profitability, driven by further extension of credit and ADAS-led replacement demand. The investment implication for GM is that its earnings and free cash flow performance could have materially greater duration than is currently discounted by the market in its 5.3x PE multiple. In addition to the $1 boost to target from high nearterm earnings, we reflect a higher for longer cycle in the increased exit margin and exit multiple which adds a further $3 of upside to our target. From our sensitivity analysis, we estimate that a 2 to 6 year longer sales cycle is worth around 25% to 70% of GM's current market capitalization."
Jonas also pointed out that GM is listening, learning, and respecting the long-term risks to its business model.
Shares of General Motors closed at $30.97 yesterday.
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