RBC Capital Dials Up EPS Estimates on General Motors Company Following Detroit Auto Show

RBC Capital's Joseph Spak pinpoints 21% upside potential for General Motors stock, betting GM International is nearing breakeven by 2019.


General Motors Company (NYSE:GM) dished out its preliminary financial results for last year while serving up a first glance at the new year’s guide at last week’s Detroit Auto Show.

With the newly issued guidance in tow, RBC Capital analyst Joseph Spak is out reiterating an Outperform rating on GM stock with a price target of $52, which implies a just under 21% upside from current levels. (To watch Spak’s track record, click here)

Calling the show essentially “GM Detroit Housekeeping,” the analyst weighs in on an event that saw the American car maker’s team toss around capital allocation plans; maintain both electric vehicle (EV) as well as autonomous vehicle (AV) targets; examine the effects of the one-time write-down of $7 billion following December’s new domestic tax overhaul bill; and share insights on NAFTA renegotiations.

Spak highlights, “Additionally, GM detailed its capital allocation plans for 2018 including ~$8.5bn in capex, driven by the truck and SUV launches and an investment of ~$1bn in Cruise and autonomous vehicles ($600mm in 2017). GM also has $3.5bn remaining on its current buyback authorization. In regard to tax reform, due to GM’s use of deferred tax assets, the book tax rate should not see meaningful change in the near term due to tax reform. However, looking ahead, we note that the lower tax rate should become a significant benefit when GM’s deferred tax assets are exhausted around 2025 or later. Finally, on NAFTA, GM appears confident the pact will not be dissolved anytime soon, as it is in active dialogue with the US, Canada, and Mexico. Though the company is in favor of modernizing the terms of NAFTA.”

Though GM anticipates to hit the tail-end of its $6.00 to $6.50 EPS guide, the company may fall short of meeting its free cash flow (FCF) target of $6 billion, with Spak attributing “lower production to right-size inventory” as the culprit. On a bullish note, GM is racing “on track to achieve all but one of their stated 2017 target.s”

In reaction, the analyst is hiking his estimates between this year and next, noting, “we now expect GM International to be closer to breakeven by 2019, driven by South America.” For 2018, the analyst boosts his EPS estimate from $6.30 to $6.45 and for 2019, the analyst dials up his forecast from $6.60 to $6.80.

TipRanks indicates cautious optimism swirling around the American car maker on the Street. Out of 15 analysts polled in the last 3 months, 9 are bullish on General Motors stock, 5 remain sidelined, while 1 is bearish on the stock. Is the stock overvalued or undervalued based on these analysts’ expectations? Consider that the 12-month average price target of $49.08 suggests nearly 14% in return potential.

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