Why This Analyst Raised General Motors' Price Target

By Daniel MillerMarketsFool.com

Detroit skyline. Image source: Getty Images.

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There hasn't been a long list of analysts posting bullish notes on major automakers over the past year, due to the inevitable peaking of the U.S. new-vehicle cycle after the industry set sales records each of the past seven years. That's why yesterday's upgrade from Morgan Stanley analyst Adam Jonas, a highly respected analyst and longtime Tesla Motors bull, was a pleasant surprise for investors. Here's what Jonas had to say as he raised General Motors' (NYSE: GM) price target from $40 to $42.

What Jonas said

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Deferred tax assets are used to offset the taxes General Motors will pay on its earnings. Thus, a lower effective tax rate will increase the company's adjusted automotive free cash flow. As of Sept. 30, 2016, GM had $34.4 billion of net deferred tax assets, which will help Detroit's largest automaker drastically offset tax liabilities on future earnings.

More positives for GM

Sure, GM's mountain-like pile of DTAs is a good thing, but there's more to like about the automaker. While total new-vehicle sales may be peaking, some upside could remain as consumers continue to park their sedans in favor of more expensive SUVs and full-size trucks. Due to that trend, GM's average transaction prices have moved from $35,300 in 2013 up to an estimated $42,200 in 2016. With sales peaking in the U.S., GM will face increasing pricing pressure, but it at least has a little more wiggle room now than it did even a few years ago.

Another positive for GM's top line, bottom line, and overall brand image is that the cadence of its new-product launches is going to improve through 2020, as you can see below.

Image source: GM's Deutsche Bank Global Auto Industry Conference presentation.

In addition to raising its average transaction prices and offering a fresher product portfolio, GM has been diligent about trimming costs and creating synergies. In 2015 GM set forth a plan to create $5.5 billion in cost efficiencies by the end of 2018, and it's progressed so well that it's bumped that estimate up to $6.5 billion. Only about $3 billion of that would be net savings, due to GM pouring some of the proceeds into investments in brand-building, engineering, and technology as the race for electrified and autonomous vehicles heats up.

A lot to like

GM's balance sheet is now investment-grade. In addition, the company keeps a constant cash-pile target of $20 billion for rainy days and has made tough decisions to pull out of certain markets and focus on others to help drive return on invested capital above 20% consistently. While most of Jonas' bullish note was based on the value of DTAs, there's a lot to like about GM, even as sales peak in the U.S. market.

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Daniel Miller owns shares of General Motors. The Motley Fool owns shares of and recommends Tesla Motors. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.