Shares of one of the world’s largest automobile manufacturers, General Motors Company (GM - Get Rating), have advanced 37.3% so far this year on the back of improved domestic and international sales, a resumption in  production, and investors’ optimism surrounding the company’s  plans regarding electric vehicles (EVs). However, its stock price has slumped 1.1% over the past month. Closing yesterday’s trading session at $57.15, GM’s stock is trading 9.9% below its 52-week high.

While investors remain optimistic about GM’s ambitious shift to all-electric vehicles and its plans to launch 30 new EVs worldwide  by 2025, a  global semiconductor  shortage could derail the automaker’s production plans. Naturally, such an eventuality could negatively impact the company’s near-term profitability.

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Here is what we think could influence GM’s performance in the near term:

Shortage in Microchips Could Affect Growth

An unprecedented shortage in semiconductor chips has forced many car manufacturers, including Volkswagen AG (VWAGY), GM and Ford Motor Company (F), to curtail their production of automobiles. Since automobiles are heavily dependent on semiconductor components—for everything from computer management of engines for better fuel economy to driver-assistance features—the semiconductor shortage has forced automakers to pause production.  Although there has been a significant improvement in capacity expansion in the semiconductor market, boosted  volumes will still take time to hit the market.

Because chip delivery bottlenecks are likely to persist in the near term, GM’s growth prospects remain clouded.

Mixed Financials and Profitability

GM’s net sales and revenue under its GMNA segment has increased 32.9% year-over-year to $30.17 billion in the fourth quarter, ended December 31, 2020. Its net automotive cash provided by operating activities rose 581.8% from its year-ago value to $5.24 billion. The company reported $2.85 billion in net income compared to a $194 million net loss in the prior-year quarter. However, the company’s revenue under its GMI segment declined 11.9% year-over-year to $3.89 billion, while the corporate segment’s revenue declined 57.4% from the year-ago value to $29 million.

The company’s 11.8% trailing-12-month gross profit margin is 64.4% lower than the 33.3% industry average. GM’s 3.4% and 0.5% return on total capital and asset turnover ratio, respectively, are 17.6% and 43.7% lower than their  industry averages. Furthermore,  its levered free cash flow margin was  negative 7.5%. However, its EBITDA margin and net income margin of 11.2% and 5.3%, respectively, are 9.8% and 3.1% higher than the  13.7% and 70.3% industry averages.

Consensus Price Target Indicate Potential Upside

Of the 21 Wall Street analysts that have rated the stock, six rated it Strong Buy and 13 rated it Buy. Currently trading at $57.15, analysts expect the stock to hit $67.19 in the near term, indicating a 17.6% potential upside. The price target ranges from a low of $27 to a high of $85.

POWR Ratings Reflect Uncertainty

GM has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. GM has a C grade for Quality. This justifies the stock’s mixed profitability. It also has a C grade for Stability.

However, the company has a B Momentum grade, which is reflective of its price returns year-to-date.

In addition to the grades we’ve highlighted, one can check out additional GM ratings for Sentiment, Growth, and Value here. GM is ranked #27 of 53 stocks in the B-rated Auto & Vehicle Manufacturers industry.

Click here to view the top-rated stocks in the Auto & Vehicle Manufacturers industry.

Bottom Line

GM’s stock has gained 173.4% over the past year. While a bounce back in automobile demand and an impressive EV assembly line have driven the stock’s price so far this year, the global chip shortage continues to be a major concern for the automaker. So, we think investors should wait until GM fares better in navigating the crisis.

Note that GM is one of the few stocks handpicked currently in the Reitmeister Total Return portfolio. Learn more here.

GM shares were trading at $55.66 per share on Tuesday morning, down $1.49 (-2.61%). Year-to-date, GM has gained 33.67%, versus a 11.14% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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