General Motors Breaks Out; Citi And JPMorgan Are Buying

• General Motors Company GM has seen 16.55 percent increase in its share price over the past three months to a high of $35.42 on October 21.
• J.P. Morgan’s Ryan Brinkman reiterated an Overweight rating on the company, while raising the price target from $45 to $47. Citi’s Itay Michaeli has maintained a Buy rating, with a price target of $50.
• The company has reported much better than expected results for the second consecutive quarter in 3Q, with meaningfully higher than anticipated profits.

Margins Could Expand Further

Analyst Ryan Brinkman expects General Motors’ margins to expand going forward, given that “improved variable profit per car of just two North America-produced models represents a ceteris paribus +72 bps y/y margin opportunity for GMNA in 2016.”

The company, however, only reiterated its confidence in delivering 10 percent margins in 2016.

Brinkman also expects positive EBIT contribution during 2016 from volumes, cost control, pricing, mix and lower restructuring. These factors could lead to margin of 10.5 percent in 2016, which is a record high that would have been “unthinkable” a year ago.

The EPS estimates for 2015, 2016 and 2017 have been raised, while General Motors has been retained as one of the top ideas on J.P. Morgan’s U.S. Analyst Focus List.

Why Buy GM

Analyst Italy Michaeli, on the other hand, believes that there are 7 reasons why investors should keep buying the stock.

Firstly, General Motors’ stock is currently trading at a discount, although the company has been “executing well, delivering commitments,” while its “numbers are rising.”

In addition, over 17 million SAAR are expected in the U.S. through 2018, within which there appears to be signs of robust demand for pickup trucks, while competitive threat remain limited. Michaeli believes that this is something that “few global OEMs can boast.”

“Besides the cycle, GM’s positive 2016-18 outlook is underpinned by several GM-specific factors from product & FinCo to tech. A year ago many doubted GM’s objectives, today a ~$6 EPS upside case is in the discussion,” the Citi report said.

Michaeli also believes that the stock has 20 percent upside potential, while mentioning that the company’s strong long term positioning for “auto mobility disruption” is being overlooked, and that General Motors’ EV battery cost edge, OnStar/LTE, global scale, small share in certain U.S. cities” and automated driving could unlock major value.