GM Shares 46% Undervalued According To This Sum-Of-The-Parts Analysis

Morgan Stanley resumed coverage of General Motors Company GM with an Overweight Rating and $40 price target.

The company faces many of the cyclical and secular headwinds other original equipment manufacturers are challenged by, but analyst Adam Jonas believes it has a window of opportunity to secure long-term success as it moves into the electric and autonomous vehicle space.

Jonas has adopted a sum-of-the-parts model for evaluating GM, a result of an “unprecedented willingness” by management teams across the industry to enact structural changes. The model will help isolate risks and identify where value can be enhanced.

The analyst also uses an SOTP model for Fiat Chrysler Automobiles NV FCAU (see Jonas' track record).

GM proved itself capable of these changes when it surprised investors by exiting its Opel business after years of claiming its importance.

“In our opinion, this was a highly significant step and could, over time, trigger a re-rerating in the shares,” said Jonas.

46% Upside Possible

The company’s price target is midway between Jonas’ base case and bull case scenarios, of $30 and $50 respectively.

GM shares closed Tuesday at just over $34, meaning they could be undervalued by as much as 46 percent.

That said, “fairly high” levels of risk account for the price target’s 17-percent upside, placing the company on the low end of Morgan Stanley’s Overweight auto stocks.

The bull case implies strategic multiples for several segments of the business that the Street may currently be assigning zero value.

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