General Motors should create a new electric vehicle company.
That's one idea that came from GM's call with analysts this week after the automaker released its second quarter earnings and the results failed to rally the stock despite beating Wall Street expectations.
GM reported it lost $800 million in the quarter. But its North America earnings were nearly breakeven with the year-ago period despite incurring eight weeks of production shutdown.
More: GM loses $800 million in 2nd quarter, but beats Wall Street projections
"Yet the stock sold off," wrote Deutsche Bank analyst Emmanuel Rosner in research notes. "Coming on the back of pronounced underperformance in recent weeks (and years), while market valuation of electric vehicle companies and startups soared, we believe this sends a signal investors are moving capital away from the combustion engine, and aggressively investing it in battery electric vehicles."
Rosner suggests GM spin off its electric vehicle operations and capabilities into a stand-alone company, thereby, "forcing the market to recognize its advanced technology, which could unlock considerable shareholder value and give the new entity access to cheap capital to fund strong expected growth."
'Nothing is off the table'
GM has said its future will be all-electric, including some self-driving cars, as it touts a strategy of zero emissions, zero crashes and zero congestion. It has promised to bring at least 20 new electric vehicles to market by 2023, the first one is due out early next year.
Rosner first pitched the idea of separating that future all-electric GM from the present company during GM's call with analysts Wednesday. His idea came shortly after Morgan Stanley analyst Adam Jonas suggested GM change its name to Ultium, the moniker for GM's proprietary batteries that will propel its next-generation electric vehicles.
"So Mary, when you look at the high market valuations and cheap access to capital of some of these electric vehicle companies we spoke about earlier, some established ones, but also many unproven startups, can that make you consider spinning off GM's electric vehicle operations and capability into a separate stand-alone entity?" Rosner asked.
Barra's response was that GM is evaluating many scenarios.
"I don't have anything further to say other than we are open to looking at and will evaluate anything that we think is going to drive long-term shareholder value," Barra said. "So, I would say nothing is off the table."
What about the stub?
Barra's reply only fueled Rosner's idea. In his research notes later, he wrote, "GM CEO’s response to our question on the topic during the earnings call might suggest GM may already be evaluating this option, although estimating a probability or timeline of it happening is difficult."
But other analysts are less keen on the idea. They see potential problems with it such as the difficulty in carving out the EV operations, doing future research without profits from pickups and SUVs to fund it and damage to the value of legacy GM.
"Barra never said anything on timing so can’t say for sure that anything is happening soon," said Morningstar analyst David Whiston when asked to comment on the idea. "The stock didn’t shoot up on that comment either, which means the market either does not think it’s imminent or it doesn’t care."
One risk to a spin-off is that the spin-off stock might not spike either, Whiston said, if speculative investors prefer to reward only startups like electric vehicle makers Tesla, Rivian and NIO. Also, it would be a monumental task to carve out the electric vehicle engineers and operations from the internal combustion operations, he said.
"If they do it, I’d rather see a much bigger battery electric vehicle portfolio than today’s," Whiston said. "The other problem is, if you do it, then does the stub (legacy GM) have no future as an investment? It’d be hard for me as an analyst to have to give the stub a value today based on sales for the next 10 to whatever years out, but then say long term it’s worth $0. I’d rather just not cover the stub."
Weak business case
GM could probably get a good stock valuation with an electric car spin-off right now, said John McElroy, host of "Autoline" in Detroit.
"The market is going crazy over EV startups right now. Just look at Nikola’s and Rivian’s sky-high valuations, and they haven’t sold anything," McElroy said. "It’s not so much that investors are moving capital away from internal combustion engines, it’s that they’re all hoping to make a bonanza investing in the next Tesla."
Like Whiston, McElroy said it would likely devastate the price of GM shares though, noting that losing the part of the company that represents future growth would result in GM shares being gutted.
“GM at that point has no value," said Sam Abuelsamid, principal analyst at Guidehouse Insights in Detroit. "The only ones to benefit from such a spin-off would be the stock market speculators who like Tesla and all these startups."
A spin-off would actually be detrimental to GM because it would have to split up so many resources, Abuelsamid said. Plus, a new company would have to fund all development for new EVs on little to no sales.
"If you spin it off now, all you’d have is the Chevy Bolt and that would be its only revenue, which is minuscule compared to all the trucks and SUVs GM sells," Abuelsamid said. "So, while they’d have a huge market cap, they’d have to keep going back to the market to do the nonsense Tesla does, which is issue new shares and get the funds to build new product. From a business standpoint, it doesn’t make sense."
Stick with the plan
To make GM's stock rise and improve its market value, Abuelsamid said the best thing to do is execute the EV strategy on time and execute it well.
"GM does not fund its business on the backs of shareholders — like Tesla does," Abuelsamid said.
Raising the shareholder value does not change the fundamentals of what GM does as a company, he said.
"I’d rather see them focus on getting these new EV products to market and getting that right rather than focus on renaming the company or splitting anything off," Abuelsamid said. "The true value will come from executing these plans.”
If there is ever going to be widespread interest in electric vehicles in North America, it will not come from anywhere south of the U.S.-Mexico border, said Jon Gabrielsen, auto industry consultant. He believes ultimately GM would hold up better than its spin-off would.
"Those countries are far less developed and not remotely interested in EVs, so EVs would boil down to U.S. and Canada," Gabrielsen said. "I believe that to even attempt to split the GM baby into an EV half and an internal combustion half would deeply maim, if not kill, the babies in the process. And even if it were able to survive, it would be the internal combustion half that thrived and the EV half that would ultimately bleed to death, regardless of what stock valuation the irrational stock market might assign to each."
More: A strange new name for GM? Analyst suggests it, Barra deals with it — diplomatically
Contact Jamie L. LaReau: 313-222-2149 or jlareau@freepress.com. Follow her on Twitter @jlareauan. Read more on General Motors and sign up for our autos newsletter.
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