Shares of General Motors Co. took a dive Tuesday toward a five-month low, after long-time bullish analyst Adam Jonas at Morgan Stanley downgraded the auto maker and slashed his price target, citing a disappointing earnings outlook and concerns over the China market.
Jonas lowered his rating to equal weight, after being at overweight since April 2018. He blamed GM’s 2022 adjusted earnings per share guidance provided last week of between $6.25 and $7.25, which was well below his forecast of $7.49, for the downgrade.
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Jonas also cut his stock price target by 27%, to $55 from $75. He said the lower-than-expected EPS guidance cut $10 off his previous price target, and his new valuation methodology — to discounted cash flow from sum of the parts — resulted in another $10 cut.
The stock GM, -2.09% dropped as much as 6.2% intraday before paring some losses to be down 2.3% in afternoon trading, which put it on track for a fifth-straight loss and the lowest close since Sept. 21. The stock has now tumbled 24.6% since it closed at a record $65.74 on Jan. 4.
Although GM’s stock might look attractively priced based on a price-to-earnings valuation metric, Jonas said “investors must consider FY22 is a near-peak cycle year” with record-high pricing, and reflects a company with a sales mix that is still 95% to 98% internal combustion engines (ICEs).
“We still harbor concerns around the legacy OEM’s [original equipment manufacturer’s] shift from ICE to electrification, which we have modeled via forecasting GM to be a smaller company going forward (-2% revenue [compounded annual growth rate] to 2030),” Jonas wrote in a note to clients.
“We note that GM’s cash flow target of $7 [billion] to $9 billion is still very strong, but investors should anticipate GM to re-invest nearly all of its cash into developing its EV/battery manufacturing base,” Jonas added.
He is also concerned about GM’s target for electric vehicle (EV) sales of 400,000 units in North America over the next two years, because he estimates that the target is “extremely back-end loaded,” with 80% of the target achieved in 2023.
Jonas said his concerns are not just about GM, as he’s getting more cautious on the outlook for foreign OEM auto business in China, via joint venture (JV), given increasing competition and the changing dynamic of the China auto market.
GM currently targets flat year-over-year profit, of greater than $1 billion, for the JVs in China in 2022. “While we believe this target is generally realistic, we believe investors should allow for a secular decline in GM Chinese joint-venture profit…as we witness compounding lost market share and declining profitability — this view is driven by a resurgence in the quality of domestic names throughout all segments in both ICE segments and ‘home grown’ nationally supported Chinese EV startups…that have a much more significant foothold in the fast-growing EV market,” Jonas wrote.
The Chinese EV startups he refers to include Nio Inc. NIO, +2.71%, XPeng Inc. XPEV, and BYD Co. Ltd. BYDDY, -0.49% 002594, -3.04%
Separately, Jonas raised Ford Motor Co.’s F, -0.42% stock price target to $13 from $12, but reiterated the underweight rating he’s had on the GM rival since January 2021.
For Tesla Inc. TSLA, +1.82%, he’s had overweight rating on the EV market leader since November 2020, and his stock price target is $1,300.
GM’s stock has shed 12.9% over the past 12 months, while Ford shares have run up 52.9%, Tesla shares have gained 6.6% and the S&P 500 index SPX, +0.72% has rallied 15.4%.