General Motors

GM's stock rose over 5% in July 21 trading as second-quarter adjusted diluted earnings per share grew 41.3% year over year to $3.57, beating the $3.20 LSEG consensus. GM also raised its 2026 guidance for the second time this year, with adjusted diluted EPS now at $12-$14 from $11.50-$13.50.

Why it matters: We were concerned that GM would have a mix headwind this quarter, given its retail channel SUV sales, but adjusted EBIT rose 29.8% to $3.9 billion. Pricing contributed $700 million of the increase, while lower warranty and other costs contributed another $300 million. The second half will not be as strong as the first half, given downtime to launch the new-generation full-size pickup trucks in the fourth quarter, but GM did say it expects 2027 to be better than 2026 on higher truck volume, more SUV production, lucrative software revenue, and buybacks. The higher guidance assumes no further major inflation pressure from commodities or the Iran war, so there is some risk to the forecast. But we see GM doing a great job on what it can control, which is making high-demand products while controlling costs and incentives.

The bottom line: We are raising our fair value estimate to $86 per share from $83 for no-moat General Motors on time value of money and improved 2026 guidance. We see GM in strong form, provided that the US economy continues to avoid recession. GM's incentives as a percentage of MSRP in the quarter were 160 basis points lower than the industry. The software business, which for OnStar has gross margins of about 70%, continues to scale, and GM Defense and insurance are growing, meaning that upside is possibly not properly priced in. Share repurchases in the quarter totaled $2 billion, bringing the first-half total to $2.8 billion for 36 million shares, almost 4% of January's shares outstanding. About $3.5 billion of authorization remains, which we expect to be used up in the next two to three quarters.

We are raising our fair value estimate to $86 per share from $83. The change is from the time value of money adjustment in our model and higher 2026 results after GM raised guidance on July 21. Our midcycle total company (including GM Financial) operating margin remains 6%.

We model equity income over our five-year forecast of about $1 billion. We will go back to modeling equity income losses each year if China’s turnaround fails to materialize, which would likely reduce our fair value estimate by at least $4-$5 per share. We remain pessimistic about GM China’s prospects for significant success, given intense competition from other Chinese automakers, so we model declines in annual equity income over our five-year forecast period.

We will continue to review our midcycle margin assumption as the company progresses through its transformative strategy announced in October 2021 and confirmed in November 2022 of targeting total company (including GM Financial) 12%-14% EBIT margin by 2030 and revenue potentially now over $250 billion after factoring in Cruise no longer in robotaxis, as announced in December 2024 (original revenue range was $275 billion-$315 billion). In recent years, however, management has indicated that the 2030 targets are aspirational or best-case scenarios. New asset-light businesses centered on data analytics and subscriptions for performance upgrades and autonomous features such as Super Cruise should enable margin expansion over time. Our weighted average cost of capital is about 10%. Our estimate for GM's midcycle automotive adjusted EBIT margin, including equity income (mostly Chinese joint ventures), is around 5% to reflect a midcycle margin encompassing the wide range of possibilities for both good and bad times.

Our compound annual revenue growth rate, excluding GM Financial, remains about 4%. We model about 80 basis points of declining North American market share from 2025 levels through 2030 because of continued strong competitive threats. This forecast may prove too punitive if GM's products remain desirable, as they were in 2025 when GM's US share increased 60 basis points. GMNA's 2025 share of 16.3% is higher than our midcycle assumption. We still model the critical midcycle automotive operating margin, excluding equity income, in the last year of our explicit forecast period at just below 5%. GM’s transformation plan was announced in late 2018, and its 2021 pivot into selling data analytics and connected services should yield billions in new free cash flow if successful. Capital expenditure is modeled at about 6% of non-financial-services revenue annually for most years of our forecast period. We model capital expenditure at about $11 billion in 2026, $12 billion in 2027 and 2028, $11 billion in 2029, and $10 billion in 2030.

GM began reestablishing its captive finance arm with the creation of GM Financial in 2010 via the acquisition of AmeriCredit. We add GM Financial to the valuation at its year-end 2025 book value of $15.8 billion, which is $19 of our fair value estimate. Our diluted share count is about 868 million, reflecting continued generous share repurchases in 2026.

GM does not have an economic moat, and we do not expect that to change. Vehicle manufacturing is a very capital-intensive business, but barriers to entry are not as high as in the past. The industry is already full of strong competition, so it is nearly impossible for one firm to gain a durable advantage. Automakers from China, which have a cost advantage over American firms, may soon enter developed markets such as the US, and South Korea's Hyundai and Kia have become formidable competitors. Many battery electric startups are emerging in addition to Tesla, such as Lucid, Rivian, and formidable Chinese EV makers. It likely is just a matter of time before Chinese automakers open US or Mexican plants to sell vehicles in GM's home market of the US. Unlike when Toyota and Hyundai-Kia first entered the US, we expect Chinese models to immediately appeal to many American consumers due to their exterior design and software-defined vehicle capability. Furthermore, the auto industry is so cyclical that in bad times even the best automakers cannot avoid large declines in return on invested capital and profit. Cost-cutting helps ease the pain, but it does not restore all lost profit in bad times. Tariffs are also making management's job harder than it needs to be.

GMNA's breakeven point of about 10 million-11 million units is drastically lower than it was under old GM.

Management is not afraid to buy back large amounts of stock, as shown by two accelerated share-repurchase programs across 2023-25 and a $6 billion authorization announced in January 2026.

GM can charge thousands of dollars more per vehicle in light-truck segments. Higher prices with fewer incentive dollars allow GM to get more margin per vehicle, which helps mitigate a severe decline in light-vehicle sales and falling market share.

GM may have to see a US recession to prove it can do much better than old GM before the market will award the stock a higher P/E multiple. The recession came in 2020, and may again in 2026 or 2027, but the P/E multiple well after the downturn is uncertain.

Auto stocks often sell off severely because of macroeconomic concerns, even if the bottom-up story looks attractive.

The US auto market is becoming more crowded each year. Hyundai-Kia, Tesla, and other firms such as new entrants from China and EV startups may take more share over time from existing players like GM.