On Tuesday morning, GM reported fourth-quarter operating income of $1.8 billion, close to what Wall Street expected. Guidance for 2024, however, was much better than expected. GM believes it will generate about $13 billion in operating profit. Wall Street was looking for $11 billion.
Shares jumped 7.8% Tuesday and gained another 3.1% in midday trading Wednesday as Wall Street reacted to the news. The
and
were down about 0.7% and 1.2%, respectively.
At prices above $39, GM stock has now wiped out all of the declines of mid to late 2023, including those triggered by fear that a new labor deal with the United Auto Workers union would crush profitability.
The industry did experience a weeks-long strike as the UAW worked to win wage increases offsetting high inflation, along with protection for employees at new EV battery plants. But although labor costs are rising, the impact on overall profitability just wasn’t as large as feared. GM expects to make more operating profit in 2024 than in 2023. Wall Street was projecting a decline.
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While management’s financial forecasts were likely responsible for most of the gains, investors should also have been happy with their guidance about electric vehicles.
“We expect our U.S. [EV] portfolio will become variable profit positive in the second half of the year based on our current expectations for EV demand and production growth, strong interest in our vehicles, lower commodity prices, and other factors,” said CEO Mary Barra in her letter for investors.
Profit is good news. Her comments about variable profits essentially mean that though EVs are less profitable than traditional cars, sales of the cars will begin to add to operating earnings.
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EVs have led to large losses for most traditional auto makers. Car companies typically need to ship roughly 400,000 units a year to turn a profit. GM plans to ship 250,000 battery-electric vehicles in 2024.
The fact that more models will be available is why GM feels good about the outlook for EVs. The all-electric Chevrolet Equinox, Sierra Denali, and Cadillac Escalade IQ go on sale in 2024.
Barra also said something new about plug-in hybrids, or PHEVs. “On the [conference] call GM pivoted towards introducing PHEVs in North America,” wrote BofA Securities analyst John Murphy. “With slower EV adoption, GM will try to bridge consumers to EVs with an interim PHEV step.”
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That could drive shareholder value, he adds. Murphy rates shares Buy and has a $75 price target.
GM, in the past, has been more focused on all battery electric vehicles, or BEVs, believing that PHEVs were more of a transitional technology. When batteries get cheaper and better, why have a gas engine and an electric motor?
In China and Europe, about two BEVs are sold for every one PHEV. In the U.S., however, the ratio is about one-to-one. PHEVs might be around in the U.S. longer than in other regions. PHEVs allow people to charge at home and do most driving on battery power, but still refuel quickly with gasoline when on a road trip.
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The pivot to PHEVs will quell some concerns about an all-or-nothing EV strategy. Strong free cash flow will also improve investor sentiment. GM will generate 20% of its market capitalization in 2024 and 2025, wrote Freedom Capital Markets analyst Mike Ward in a Wednesday report. He increased his price target to $69 from $60. He rates shares Buy.
Overall, 67% of analysts covering GM stock rate shares Buy. The average analyst target price is about $47.50. The average Buy-rating ratio for stocks in the S&P 500 is about 55%.
Wednesday’s gain in the stock is a sign that investors are still feeling positive even after Tuesday’s rally.
Write to Al Root at allen.root@dowjones.com