Ford And GM Should No Longer Be Valued As Traditional Auto Companies (NYSE:F)

Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) have traditionally been valued at a much lower multiple than companies in almost every other industry. My contrarian belief is that that will change soon, and it’s time to invest now before that happens.

Traditionally, auto companies have P/E ratios well below companies in other industries. Ford’s P/E is 4.3X, and GM’s is 6.6X, well below the S&P P/E of approximately 19X. Traditionally, the auto industry has been slow-growing, carried additional cost burdens, lagged in innovation, and was subject to economic swings. However, some companies in the auto industry are changing dramatically. The transition to electric vehicles (“EVs”) and the increasing inclusion of software revenue streams make them more technology-based. A higher valuation multiple for technology-based vehicle companies is evidenced by how investors view Tesla (TSLA), giving it a P/E of 86X. This comparison is not to say that Ford and GM should be valued at an 86X P/E, but it supports the argument that a 5-7X P/E is too low.

In the near term, it’s important to recognize that auto companies are not demand-limited but supply-chain constrained. This backlog provides them with a near-term buffer for fluctuations in consumer demand.

Analysts are also projecting much higher prices for Ford and GM. For example, BofA’s target price for Ford is $28 per share (130% higher than the current price of $12.20). And this is based only on a P/E ratio at the high end of its traditional range of 3-6 using projected 2023 EPS. Its price target for GM is $90 per share (160% higher than its current price of $33.58). Again, this is based on a P/E that is only at the high end of its traditional range of 3-6X using 2023 projected EPS.

I’ll argue that these companies are transitioning away from traditional auto manufacturing and deserve much higher P/E multiples. What would their stock prices be if higher P/E ratios were applied to current EPS?

	EPS	Current Price	10X PE	15X PE	19X P/E
Ford	$2.88	$12.20	$28.80	$43.20	$54.72
GM	$5.26	$33.58	$52.60	$78.90	$100

Click to enlarge

The transition from the traditional business model

Ford and GM are undergoing significant transformations from traditional auto companies to technology-based growth companies with much greater software and services content. Eventually, and I think sooner rather than later, P/E ratios used in the valuation of Ford and GM will become more like other companies and maybe even as high as technology companies.

Here are some reasons justifying this transition.

1. EVs are a major new market opportunity

EVs are vastly different products from traditional cars, and as adoption rates of EVs increase, they create incremental growth opportunities for Ford and GM. Over the next five years, more people will trade in their current internal combustion engine (“ICE”) cars for the benefits of EVs. Forecasts vary, but the consensus is that 30% or more of all new vehicles will be EVs by 2030. Federal tax subsidies for EVs will accelerate the transition to EVs.

Ford’s EV strategy is intriguing. It decided to go all-in by building EV versions of its three most popular vehicles, which leverages brand popularity and plays to the buying preferences of the mainstream market. Ford is investing $50 billion in EV development and manufacturing facilities and has created a separate business unit, Ford Model e. Ford plans to follow its first three EV models with a continuous stream of new EVs. It has publicly stated bold sales projections of 600,000 EVs next year and 2 million in 2026. Ford is all in with EVs. For more on this, see “Ford: A Unique Investment Opportunity As EVs ‘Cross The Chasm.'”

GM is also aggressively replacing its ICE vehicle models with new EVs. It plans to invest $27 billion in electric and autonomous vehicles by 2023. GM will offer 30 EV models globally by 2025, and the company estimates sales of more than 1 million EVs in China and the United States by then. The first EVs from GM are the 2022 Cadillac Lyriq and an electric version of the GMC Hummer.

2. EVs are very different from ICEs

Traditional ICE manufacturing is much more complicated and costly than making EVs. Ford and GM are making a successful transition to manufacturing EVs. GM’s Ultium is an advanced electric vehicle platform built on a flexible battery architecture for producing EVs with outstanding power, range, and performance across different vehicle types. Battery and related technologies are the new platforms to replace the ICE platform. Both Ford and GM are uniquely positioned to take advantage of the improvements and cost reductions expected in battery technology. They leverage their investment power and manufacturing experience to create new battery-based platforms.

3. They are expanding into new services

Ford and GM are also expanding into new service businesses to take advantage of the move to mobility and expand their market beyond traditional auto sales. For example, GM BrightDrop is a new business that offers a system of connected products targeting first- and last-mile delivery customers. The BrightDrop system doesn’t just include electric delivery vans. It’s essentially an e-commerce delivery ecosystem that includes software, access to charging station providers, and even electric propulsion–assisted pallets that can be used in the warehouse or on the street for delivery and package pickup.

BrightDrop delivered 150 vans to FedEx in June. FedEx (FDX) and GM had previously announced deals for the package delivery company to purchase 2,500 of BrightDrop’s electric vans, with negotiations for another 20,000 vans pending. Walmart (WMT) had also previously announced a deal to purchase the vans. Based on GM’s estimates, the opportunity for BrightDrop is substantial. The automaker said that by 2025, the combined market opportunity for parcel delivery, food delivery, and reverse logistics in the U.S. would be more than $850 billion. According to the World Economic Forum, the demand for urban last-mile delivery is expected to grow by 78% by 2030, leading to a 36% increase in delivery vehicles in the world’s top 100 cities.

4. The amount of software and computing power in new vehicles is substantial

Features like advanced driver assistance and semi-autonomous driving are becoming standard in many new vehicles. New vehicles of today are on their way to becoming computers on wheels. GM and Ford are among the leaders in this transition. It’s no longer just Tesla anymore. The software capability in new vehicles from Ford, GM, Mercedes, and others is now almost comparable to that from Tesla (and I’ve driven them all, including Tesla’s new FSD X.69).

GM’s Super Cruise enables semi-autonomous driving on highways. Its new Ultra Cruise will be launched in 2023 and will cover more than 2 million miles of roads at launch in the United States and Canada, with the capacity to grow up to more than 3.4 million miles. Customers can travel hands-free with Ultra Cruise across nearly every road, including city streets, subdivision streets, and paved rural roads, in addition to highways. It will even support parking in residential driveways. It includes lidar sensors and will be a more advanced autonomous driving platform than Tesla’s FSD. If Tesla can charge $15,000 for its FSD software (see, “How Much Does FSD Impact Tesla’s Valuation?”), then GM should be able to create a highly profitable software revenue stream with Ultra Cruise.

Ford’s Blue Cruise is a similar software-based semi-autonomous driving system. It does In-Lane Repositioning, recognizing when there are vehicles in adjacent lanes, and will then shift further away from them. The Predictive Speed Assist feature adjusts your speed when approaching a curve. These are features that Tesla FSD still doesn’t have.

5. Autonomous ride services offer an enormous upside in valuation

Autonomous ride services now offered by GM Cruise in San Francisco provide an enormous new market opportunity. I’ve written about this recently (“Advantages GM Cruise Has Over Uber,” and “Notable Progress At Cruise Increases GM’s Value“), so I won’t go in-depth here.

In October 2021, at its investor presentation, Cruise made some bold claims projecting that it could grow to $50 billion in revenue in six years and have margins in the ballpark of 40%. GM reaffirmed this projection on its Q2/22 earnings call:

“The permit received by Cruise is a major event in the overall objective to pursue $50B potential annualized revenue by the end of the decade and continues to validate GM’s bullish approach on the AV strategy.”

In 2021, Cruise had outside investors, including Honda and Microsoft, that valued it at $30 billion. If you deduct GM’s 80% share of this $30 billion from GM’s market cap of $49 billion, then the remainder of the company would be valued at a paltry $19 billion. This is a net valuation of about $12 per share with a P/E of 2.3X. So, investors aren’t assigning any value to Cruise. Cruise could potentially add hundreds of billions to GM’s value over the next five years.

Ford owns 40% of Argo, which is making good progress with its autonomous ride services and autonomous home delivery. This could provide additional upside to its value in the next few years.

Immediate-Term Opportunity

Unlike the market’s negative opinion of Ford and GM right now, I believe that these traditionally lower valuations will change soon. Some investors are assuming that a declining economy will reduce auto revenue. I don’t believe this to be the case for the following reasons:

• There is pent-up demand for new vehicles. U.S. new car sales last year and this year were approximately 13 million, much lower than the typical average of 17 million cars. While sales may not return to 17 million, there is pent-up demand accumulated over the past three years that can fuel increased sales in 2023 and 2024, even in the face of an economic downturn.
• Both Ford and GM have a backlog of customer orders to fill. Supply chains, not customer demand, determine current revenue.
• Adding to this is the need to restock dealer inventories that are currently 20% below average (BofA Research).
• There is increasing demand for EVs, encouraged partly by tax incentives, and I expect customers will order EVs to replace their ICE vehicles earlier than they would typically replace their cars.
• Finally, new businesses such as Cruise, BrightDrop, and Argo should demonstrate added value in the next year.

Finally, both companies also pay a dividend, although Ford’s at 4.85% is much better than GM’s at 1.04%.

In sum, contrary to the market perception of Ford and GM, they are now unique investment opportunities with little downside and tremendous potential gain.

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