After spending years frustrated by Wall Street's lack of interest in record profits, a fortress balance sheet and a revamped approach to selling cars, General Motors Co. has decided to change its story. And investors are finally listening.
GM reports third-quarter earnings Tuesday following a flurry of announcements about rapid advances in driverless-car development. The company's share price -- stuck in neutral during Chief Executive Mary Barra's nearly four-year tenure -- is springing to life, trading well above the previous highs notched since GM's 2010 initial public offering.
The company's $66.5 billion market value firmly outpaces Ford Motor Co., whose shares have languished in recent years, and Fiat Chrysler Automobiles, which is valued far below GM but trading near a several-year high amid rampant takeover rumors. But more important than beating Detroit rivals, the largest U.S. auto maker appears to be lapping Tesla Inc., a small electric-vehicle maker held up as the auto industry's future.
Tesla, founded by billionaire Elon Musk, stole the crown as highest-valued domestic auto maker earlier this year. Production hiccups with its new Model 3 mass-market sedan, however, have dampened enthusiasm for Mr. Musk's plan.
"We see potential for investors, both auto and non-auto, to view GM's progress and Tesla's production challenges as a sign that some of Tesla's market cap needs to go back to GM," Barclays auto analyst Brian Johnson wrote in a recent note to investors. GM has been underestimated in the emerging automotive tech race, he said, and shouldn't necessarily take a back seat to Silicon Valley's newcomers, including Alphabet Inc.'s Waymo and Uber Technologies Inc.
A GM spokesman said that while the company is pleased with its recent share gains, it continues to believe the stock is undervalued. GM remains focused on "delivering strong and consistent results" and generating higher returns for shareholders, he said.
Ms. Barra began building the case for GM as a new-mobility pioneer in early 2016, sinking $500 million in ride-hailing company Lyft Inc. and purchasing Cruise Automation, a Silicon Valley startup focused on autonomous cars. The value of Lyft has doubled since then, and Cruise's staff has grown to about 350 from 40, with employees saying GM's ownership provides a smoother pathway to the mass production of robotaxis.
Cruise earlier this month acquired Strobe Inc., a company that makes low-cost "lidar," or the laser/radar technology that serves as an autonomous car's eyes and ears. These developments, combined with momentum on electric vehicles, have killed the suggestion that GM is "a dying dinosaur," Mr. Johnson said.
The pressure, however, isn't off Ms. Barra as she chases the lofty target of being the world's most valued automotive company. Joseph Spak, an RBC Capital Markets auto analyst, said investors need to question whether GM is adequately funding technology play that "may burn cash for a long time." And there is no clear strategy to make money on self-driving cars, electric vehicles and ride sharing.
The car business, meanwhile, faces headwinds, with GM poised to report a 33% decline in operating profit for the quarter ended Sept. 30. GM's North American production declined 25% during the third quarter, according to WardsAuto.com.
Lower output is due to slumping demand for GM's bread-and-butter family cars, luxury sedans and compact vehicles, as well as other production-related factors. Revenue is booked at the point of production, so slower factories likely hit GM's top line hard.
Adding further pressure is the company's increased reliance on sales incentives during the summer as it cleared excess inventory off dealer lots and spent heavily on disaster-relief programs in September.
Ms. Barra, however, is reducing GM's exposure to volatile markets at a time when many of her competitors are embracing them. GM closed the sale of its money-losing European business in August, shortly after exiting the Indian and Russian markets. More recently, it consolidated all of its remaining non-China international businesses into a single operation and shuttered production in Australia.
These moves could help GM maintain its record profit clip, even if volumes in China and the U.S. fall off all-time highs. The company forecasts 10% operating margins in its North America business, mirroring a profit haul typically enjoyed only by luxury brands or Toyota Motor Corp.
Ms. Barra's blueprint contrasts domestic counterparts. Analysts say her ability to create more daylight between GM and its rivals will further bolster the case for an outsized valuation.
Fiat Chrysler CEO Sergio Marchionne has been slow to embrace moonshot ideas and has instead focused on finding a partner capable of boosting the company's scale. Even though Ford is moving ahead in driverless cars and EVs under a new CEO, the No. 2 U.S. auto maker's progress is murky and the company's new cost-cutting efforts appear to be the central narrative. Both companies report earnings next week.
Tesla, reporting Nov. 1, has a well-publicized list of challenges, will post deep losses for the July through September period, according to analyst expectations. The company finished the latest quarter with $3 billion in cash and plans to spend $2 billion in the second half to make way for the Model 3.
Write to John D. Stoll at email@example.com
(END) Dow Jones Newswires
October 22, 2017 08:14 ET (12:14 GMT)