GM shareholders have never had it this good

Mary Barra — and GM shareholders — is about to have the best shareholder meeting of her seven-plus year tenure on Monday.

At last year’s annual meeting the company was struggling to recover from the double blow of the pandemic, which had closed most of its plants and dealerships and raised doubts about car demand going forward, and a crippling six-week strike the previous fall that cost it nearly $3 billion.

What a difference a year makes: GM is about to complete the most profitable 12 months in its 112-year history, despite a computer chip shortage that has forced it to close some plants and cut production.

The company is also making progress on its goal of shifting to an all-electric future. In April it sold more electric cars globally than either Tesla or Volkswagen, according to an estimate from Morgan Stanley.

But the profitability success is thus far more substantial than the still nascent EV operations at GM.

Record profits

In the last three quarters the nation’s largest automaker posted adjusted earnings before interest and taxes of $13.4 billion, topping the best full-year measure of those profits of $12.5 billion in 2016.

While the second quarter results are likely to be ones most affected by plant shutdowns, GM previously said it expected $1.1 billion in adjusted earnings in the period. And earlier this month the company said because of better-than-expected progress in ramping up production affected by the chip shortage, it now expects second quarter results to be “significantly better” than previous guidance.

GM results have been helped by the unexpected surge in demand for new vehicles in recent months, which has resulted in higher prices and less need for incentives to attract buyers. That strong demand is part of the reason for the chip shortage.

“We’re in an unprecedented level of consumer strength. That will revert back to the mean a little bit,” said CFO Paul Jacobson at a June 3 investor conference. “While it’s too soon to say if this is the run rate or the peak, I can tell you the team is very focused on making this the norm and not the exception.”

The shift to EVs

Barra argues the cost improvements the company has made has positioned it well for the future, as it shifts from traditional internal combustion engines (ICE) to electric vehicles. EV’s are not just cleaner, they also have fewer moving parts and require significantly less labor to assemble, making them potentially more profitable in the long term.

“We do a strong ICE business that generates a lot of free cash flow, and that’s what we’re using to reinvest…helping us fund the business transformation. We’re not constrained for capital,” said Barra at the June 3 conference. She said that while the company does want to restore the dividend and share repurchases it suspended in April 2020 to save cash in the depths of the pandemic, the priority is investing more into the transformation to EVs.

In January it announced an “aspiration” to sell nothing but emission-free vehicles by 2035, as it increased by $7 billion the amount of money it has dedicated to developing EVs and autonomous driving vehicles over the next five years, putting its investment target at $27 billion.

It has two new EV battery plants planned in the United States for its new Ultium EV battery, one in Lordstown, Ohio, the other in Spring Hill, Tennessee. It plans to unveil 30 different electric vehicles by 2025, with 20 of them slated for the US market.

EVs still in early stage

But so far the promise of EVs for GM are just that — mostly promises.

Its only US EV is currently the Chevrolet Bolt, whose sales were up more than 50% in the first quarter compared to a year earlier but still accounted for just over 1% of US sales.

It’s best selling EV is a Chinese microcar, the Wuling Hong Guang Mini, which has become the number one selling EV in China, but it’s not a vehicle that would be allowed on US roads.

Investors are more excited by future EV plans than current profits. That’s why Tesla has become by far the most valuable automaker in the world despite relatively modest annual sales of 500,000 vehicles last year. Investors are betting on the promise of the EV future. So that is why Wall Street is more excited than ever about GM shares.

Overcoming a history of weak stock performance

On Monday GM hit a market cap of $93 billion, a record high for the company. The company’s pre-bankruptcy high point for market value was $61.3 billion in May 1999, according to the Center for Research in Security Prices at the University of Chicago.

Although share prices have slipped 4% from that high point, they are still up 329% from where they bottomed out last March in the early days of the pandemic. Even excluding that plunge, shares have risen 68% from where they were at the end of 2019, pre-pandemic, and 48% higher year-to-date in 2021.

And shares are expected to keep climbing. Of the 22 analysts with recommendations on the stock, 13 are advising clients to buy, with seven more having strong buy recommendations. The remaining two are neutral.

It’s quite a change from a stock that rarely got love from investors in the past, even when it was very profitable. In 2015, when GM posted record net income of nearly $10 billion, its shares actually declined slightly.

Over the course of Barra’s first six years as CEO, from when she assumed the job in 2014 through early 2020, ahead of the pandemic, shares fell by 10%. They traded mostly in the narrow range of $30 to $40 a share, no matter the profits reported, no matter the costs cut, no matter the number of shares it repurchased under pressure from major shareholders.

As Barra meets virtually with shareholders Monday, she may get questions about the dividend and share repurchases resuming. But she can also talk about the best performance for shares in memory.