Cheap GM to rally 19%, Morgan Stanley's Jonas says

Published Mon, Sep 19 201610:07 AM EDTUpdated Mon, Sep 19 201610:28 AM EDT

Morgan Stanley upgraded shares of General Motors to overweight from equal weight on Monday, predicting a 19 percent rally in the next 12 months to $37, saying increased competition from Tesla and other makers of self-driving cars is still a long ways away. "With all the excitement around fully autonomous transport, we believe investors may be overlooking the steps and the time required to get there. Regarding the now well understood 'peak auto' thesis, we think investors may be underestimating how long this cycle can last and the related levels of mix and profitability," analyst Adam Jonas wrote. Jonas is one of the most-followed Tesla analysts on Wall Street. Shares of the electric car maker are down more than 20 percent since he downgraded the stock to equal weight in late June. General Motors, 1 year Source: FactSet In the past year, shares of General Motors have lagged behind the market, up about 1.5 percent, compared with a return of 9 percent for the S & P 500, as investors questioned the sustainability of the firm's business model given the rapid technological advancements in self-driving cars. Despite all the buzz around autonomous transportation, the transition period is likely to take time, according to Jonas. He said GM can "generate cash, return cash and nurture new businesses" while the adoption of self-driving cars takes place. "GM is in position to make hay while the sun is still shining, return cash to shareholders, and potentially explore new structures to compartmentalize various parts of the business in areas where they can exist outside of the umbrella of the parent company," the analyst wrote. Similarly, stable earnings through 2018 could become a "material inflection" that could result in greater free cash flow and higher stock prices, according to Jonas. "Perhaps most importantly, our Ford estimates have been going down while our GM numbers are going up," he said, adding that at the current levels, the shares are undervalued. —CNBC's Michael Bloom contributed to this story

A worker on the assembly line at the General Motors Assembly Plant in Arlington, Texas

Mike Stone | Reuters

"With all the excitement around fully autonomous transport, we believe investors may be overlooking the steps and the time required to get there. Regarding the now well understood 'peak auto' thesis, we think investors may be underestimating how long this cycle can last and the related levels of mix and profitability," analyst Adam Jonas wrote.

Jonas is one of the most-followed Tesla analysts on Wall Street. Shares of the electric car maker are down more than 20 percent since he downgraded the stock to equal weight in late June.