GM gains as analyst says strong car sales may last longer than thought

The shares of General Motors (GM) are advancing after Morgan Stanley upgraded the automaker to Overweight from Equal Weight, arguing that the company "can remain relevant and profitable for longer than the market thinks."

MEDIUM TERM OUTLOOK SEEN AS POSITIVE: After reassessing his forecast for GM, Morgan Stanley analyst Adam Jonas thinks that the company's earnings can be flat in 2017 and 2018, exceeding analysts' estimates by about 5%. The stability would indicate that the company's business has reached a positive turning point, according to Jonas. Moreover, the analyst believes that it will take some time for self-driving cars to hit the market. Meanwhile, "investors may be underestimating" how long the current strong level of car sales can last, "driven by increases in credit and demand for vehicles" with advanced driver assistance systems, Jones believes. Consequently, GM's earnings and free cash flow could stay strong for a significantly longer time than investors realize, the analyst stated.

SHAREHOLDER FRIENDLY ATTRIBUTES: GM is well-positioned to return cash to shareholders and spin off parts of its business, according to Jonas. The company's decision not to buy Lyft could indicate that it has learned that investors are not pleased with major acquisitions, the analyst believes. Additionally, he raised his estimate of the value of GM's Chinese joint ventures. Jonas increased his price target on the stock to $37 from $29.

PRICE ACTION: In early trading, GM rose 3.4% to $32 per share. The other two large U.S. automakers also climbed, with Fiat Chrysler (FCAU) advancing 3.8% to $6.59 and Ford (F) adding 1.5% to $12.30.