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When General Motors reports fourth-quarter financial results on Tuesday morning, robotaxi updates could matter almost as much as recent profits. Whether that is justified is beside the point. Better storytelling has been driving the stock higher.

After all, both GM (ticker: GM) and Tesla (TSLA) are story stocks, meaning they both trade on distant expectations, not current income. The difference is that until recently, Tesla’s story has ended in riches, and GM’s, in hardship and extinction. First, the story has gone, car demand in the key North American market, which has been riding too high for too long, will drive off a cliff. Then, gradually, self-driving electric cars fetched by ride-hailing software will take the place of private ownership of gas guzzlers. Tesla, Uber Technologies, and the Waymo division of Alphabet (GOOGL) will be first in line to prosper. Legacy metal-benders like General Motors won’t know what hit them.

That helps explain why, a year ago, GM was the single cheapest stock in the Standard & Poor’s 500 index, at barely six times forward earnings estimates, and why last April, profitless Tesla passed GM to become the biggest U.S. car maker, based on stock market value, even though GM’s sales are 12 times larger.

THE STORY IS STARTING to change, however. Late last year, GM outlined an ambitious plan to introduce fleets of self-driving taxis in select cities in 2019, using what it has learned from San Francisco startup Cruise Automation, which it bought in 2016. Less-noticed, perhaps, than Tesla taking the market-value lead last spring, is that GM has clawed it back, if only narrowly. Over the past six months, the old-line auto maker’s stock has gained 18%, versus 5% for Tesla, which has struggled to ramp up production of its key Model 3 sedan. GM’s market value was recently $58.2 billion, and Tesla’s, $58 billion.

Even after its recent run, GM sells at just seven times forward earnings estimates; it was recently the fourth-cheapest S&P 500 stock. That creates potential for a handsome gain if GM can merely convince investors it is not a dinosaur. “Think of autonomous cars like a marathon at mile 17,” says Barclays Capital analyst Brian Johnson. “The winner is likely to come from the front pack, but not everyone in that pack will win. What is impressive about GM is that it has suddenly joined the pack.” Johnson’s price target of $57 for the shares implies more than 35% upside from a recent $41, yet includes no value for autonomous cars. Meeting the target would leave General Motors at less than 10 times projected earnings. The dividend yield is 3.7%.

We are under no illusions about robocars. The technology is tantalizingly close, but widespread adoption is likely many years away. Between now and then, regulators will want to see exhaustive proof that self-driving cars are safer than human-driven ones. The statistical bar is low; some 1.25 million people die worldwide each year in crashes. But a skeptical public must be won over, and when robocar glitches begin causing fatalities, as they surely will, adoption could be held up for years, no matter what the numbers say.

“That last 1% move toward self-driving cars might be the most difficult thing humanity has ever attempted,” says Morgan Stanley automotive analyst Adam Jonas. “It’s harder than landing a man on the moon and returning him safely.”

That makes GM first, and primarily, a traditional car and truck maker. That’s good news, because business has rarely been better. The company’s collapse during the Great Recession brought profound changes to its labor deals, resulting in lower costs, more flexibility, and less overhang from retirement obligations.

Mary Barra, who took over as chief executive in 2014, has worked to streamline the model count, base more models on each underlying vehicle platform, and extend the lifespan of platforms. Barron’s added Barra to its list of the world’s best CEOs last year, shortly after her company’s exit from the European market, after years of losses there. Last quarter, all of GM’s operating divisions were profitable for the first time since 2014.

ON TUESDAY, investors do not expect to learn that GM’s revenues have grown. In fact, the consensus estimate calls for a 16% decline from a year ago, to just under $37 billion, but for an 8% rise in earnings per share, to $1.39. Part of the revenue decline will come from leaving Europe. GM has also said it will cut production of its least-profitable cars, and slow output in its most important category, North American trucks, to retool plants for significantly redesigned models to be launched later this year. Meanwhile, demand in North America has indeed peaked, although the decline has been modest, and the mix, favorable. In the fourth quarter, industrywide U.S. sales were down 1.5%, but those of lucrative pickup trucks were up 6.8%, according to Barclays’ Johnson.

“We think the cycle is closer to a plateau than a cliff,” says Edward Wojciechowski, co-manager of the Oakmark Equity & Income fund (OAKBX), which ranks near the top of its peer group for long-term performance, according to Morningstar, and recently counted GM as its second-largest holding. “Demand will come down, but not a lot, and GM is fundamentally a truck company, which gives it a somewhat different cycle with less competition than the car business.” Wojciechowski says the platform investments GM has made could soon give way to a period of lower spending and rising free cash flow. That could create a virtuous cycle in which GM has more money to spend on dividends, share repurchases, and pension contributions, and to invest in initiatives, including in its Auto 2.0 plan.

It is too early to say who’s ahead in robocars. The latest data from California testing shows that GM, which got off to a later start than Waymo, is making significant progress in closing the gap on miles driven and how many miles cars can go, on average, without needing a human to take the wheel. It’s unclear how even the comparison is; GM is testing in a demanding city environment in San Francisco, and plans to expand to Manhattan as soon as the current quarter, while Waymo is believed to be testing in less-dense areas.

For investors, there are two key things to know about Auto 2.0. First, autonomous driving, electrification, and ride-hailing apps might sound like separate, disruptive forces, but they’re really three legs of the same stool. Ride-hailing is cheaper with drivers removed. Electric cars become more economical once they are run round the clock as part of robotaxi services. So, it helps if a company that wants to make a play for the automotive future can do each of these things.

GM has a long history in electric cars which includes the EV1, produced in the late 1990s, and the Volt, launched in late 2010. Don’t confuse that with the current Bolt, which Car and Driver says “gives Tesla a run for its money,” going 190 miles on a charge at highway speeds. In addition to GM’s Cruise investment, it has spent on ride-hailing, both internally, via its Maven division, and externally, through a stake in Uber’s rival Lyft. It also has invested in lidar systems (like radar, but with lasers) and batteries, and it has profitable joint ventures in China, a nation far ahead of the U.S. on electric-car sales.

The second thing to know about Auto 2.0 is that although it is a long-term threat to the current model of private car ownership, it might just prove more profitable. In late November, when GM presented its robotaxi plans to investors, it predicted that once prices for ride-hailing fall to $1 per mile from $2 to $3 today, the service could account for 20% of miles driven, versus less than 1% now, which would turn it into a $750 billion market, potentially with profit margins twice as large as GM’s today. If General Motors can gain just a 10% share of the market by then, it could generate robo-taxi earnings, before interest and tax, of $19 billion, reckons Barclays’ Johnson. That compares with $12.5 billion in Ebit for GM last year. The car maker says it’s on a path to get costs down to that $1-a-mile tipping point by the middle of the next decade.

MAYBE THIS IS PIE IN THE SKY, but if that is what has gotten GM stock moving in the right direction, shareholders should hope for a second helping Tuesday. The key risk for General Motors in the year ahead is that the economy sours and vehicle demand deteriorates, in which case no amount of robotalk will likely impress investors. We also must confess that we have a history of being too bullish on the Detroit giant. Its shares have returned 15%, less than half of what we predicted, since we recommended them a year ago (“GM Shares Could Drive 35% Higher,” Feb. 18, 2017).

One last point on automotive disruption: there is something future-friendly about GM’s current business of selling beefy pickups and sport utility vehicles to rural and suburban buyers. “When robotaxis come, they will come first to cities, where GM is underrepresented,” says RBC Capital analyst Joseph Spak. That gives GM a green light to chase the autonomous future, knowing that opportunities to profit will remain long after steering wheels, gas pedals, and home garages have begun to disappear.

The Bottom Line: Selling at just seven times forward earnings, GM shares have room to rise more than 35% in the year ahead.



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