GM has some skeptics on Wall Street about its ambitious EV plans

Published Fri, Nov 18 20229:45 AM ESTUpdated Sat, Nov 19 202212:45 PM EST

DETROIT – Wall Street is skeptical of General Motors' plans to produce profitable electric vehicles years ahead of schedule and substantially bring down battery costs amid supply chain problems and broader economic concerns. Following an in-depth investor event Thursday afternoon in New York that outlined its short-term financials and growth plans for EVs – something investors had been wanting – GM did not receive any ratings upgrades or even price target increases from major investment banks as of early Friday morning. Larger macroeconomic concerns, supply chain constraints, and the company's overall ability to deliver on what some analysts described as "ambitious" and "overly optimistic" targets for revenue growth, EV profits and reductions in battery costs were among the top concerns. "Against the current macro backdrop, the business plan appears very ambitious: The combination of higher growth spending and a negative EV mix effect on margins at a time when pricing is at peak levels will probably result in some investor skepticism," UBS analyst Patrick Hummel wrote in an investor note Friday, reiterating a neutral rating and $38 price target. The investor day appears to have cemented many opinions of analysts but wasn't enough to move the needle amid broader economic concerns. GM's stock closed Thursday up by less than half a percent to $38.64 per share. The shares were higher Friday by about 2% despite the tepid analyst reaction. "Did GM shock us with anything? – NO, but they gave the added detail for the stock to grind higher as macro improves," Evercore ISI analyst Chris McNally wrote in a note Friday. He reiterated an overweight rating and $50 per share price target. GM's average rating is overweight with a 12-month target price of $47.77 per share, according to data compiled by FactSet. The most surprising announcement Thursday was GM's forecast for EV profits, including expected benefits from federal tax credits, to be in line with cars and trucks with traditional engines by 2025. That would be years ahead of schedule and mean a dramatic decline in the automaker's battery costs amid supply chain problems, cyclical demand concerns and potential shortages in raw materials. Despite GM saying it has secured binding commitments for all the battery raw materials to produce 1 million EVs in North America by 2025, analysts are more pessimistic regarding the automaker's battery plans. "GM's margin targets look overly optimistic in our view," said Wells Fargo analyst Colin M. Langan in an investor note Friday, citing it's "unclear" how the company will lower battery costs, "which is critical for 2025 margin targets." GM said it expects to reduce its Ultium cell costs to $87 per kilowatt-hour in 2025 and below $70/kWh by later in the decade. That would be a substantial decline compared with today's expected costs, which GM declined to release. Wells Fargo says it expects costs of batteries with similar materials to cost about $151/kWh. Other GM announcements included expectations for revenue to increase at a 12% compound annual rate to more than $225 billion, including $50 billion from EVs, in 2025; outline of its products by 2025; and confirmation of previously announced 2030 targets. GM on Thursday also raised its guidance regarding free cash flow and narrowed its earnings expectations for 2022. It boosted its cash flow guidance to between $10 billion and $11 billion, up from $7 billion to $9 billion. It also tightened the adjusted earnings range to between $13.5 billion and $14.5 billion, compared with its previous guidance of $13 billion to $15 billion. Here are comments from other analysts as well as their ratings and price targets for GM following the investor event. JPMorgan: Overweight, $59 target "We rate GM Overweight for its best-in-class leverage to global growth markets, ongoing operational turnaround, and improving product cadence. We are attracted to the shares based on both valuation and what we see as several upcoming positive catalysts." RBC Capital Markets: Outperform, $44 target "Overall, the message from GM's Investor Day was they spent the past 4 years preparing for this moment, have done the heavy lifting and are now ready to execute at scale on the EV opportunity. The excitement is clear, opportunity at their hand, and IRA can help. Plans/targets provided were better than we expected, but there are still some elements that seem vague so market unlikely to give full credit just yet." BofA Securities: Buy, $90 target "In our view, the event was constructive, and further illustrated GM as an industry leader in what we characterize as the Core to Future transition. We maintain our Buy rating." Jeffries: Hold, $35 target "At a critical investor day, GM doubled down on already high growth ambitions at a time of cyclical and structural uncertainty." Deutsche Bank: Hold, $35 target "Overall, we view GM's message as quite bullish, as the company is targeting EV operating margins in the low- to mid-single digits by mid-decade (not including considerable IRA benefits), which would enable it to maintain stable 8-10% operating margins overall in North America through 2025, ahead of investors' expectations into the event. However, important questions remain around the drivers of this positive forecast." Goldman Sachs: Buy, $42 target "We believe that the event was a positive, with GM articulating a path to EV profitability in 2025 even before IRA credits, reiterating its 2030 targets (e.g. a 12-14% EBIT margin), and guiding for a solid North America EBIT margin through 2025 (of 8-10%) even with the EV transition and potential price-mix normalization. "One of the key debates among investors (besides macro and the cycle) is the ability for auto OEMs to capitalize on the shift to EVs, and the implications for profits." — CNBC's Michael Bloom contributed to this report.