As expected, General Motors Company (GM) crushed Wall Street estimates on strength in the U.S. and China, but investors are going to have to wait a bit longer until GM stock begins to reflect the improvements.
That’s no knock on General Motors. Sales have been purring along for three years now, setting records all along the way. Profitability is improving, and China — an area of weakness for most multinationals — is a fountain of growth for the automaker.
Indeed, business at GM and rival Ford (F) has been going pretty well for some time now, but their stocks remain out of favor and there’s not much either company can do about it.
Investors might be bullish about 2016’s new models and the margin-boosting effects of low gas prices, but the wider macroeconomic headwinds remain stiff.
Equities are out of favor this year, especially those with exposure to the stronger dollar and slowing global economy. Further, legacy issues over the ignition switch recall no doubt contribute to the poor sentiment on GM stock.
The market’s poor view of General Motors stock sent shares down 19% in the last three months, a span in which the broader market lost 10%
General Motors Is on Deep Discount
Hey, so much the better for value hunters. It’s going to take a while, but eventually GM is going to get priced to reflect the realities of its strengthening position.
After all, few multinationals have escaped the damage wrought by China’s decelerating economy, but General Motors can still count the area as a major driver of growth.
No, car sales aren’t what they once were, but they are still plenty healthy in General Motor’s largest market. Indeed, after many months of declines, a big tax cut on the purchase of new cars reversed the trend, pushing sales to a new record last year.
And as for the U.S., strong demand for higher margin SUVs and pickup trucks is greatly boosting the bottom line.
For the most recent quarter, GM earnings came to $1.39 a share on an adjusted basis. Analysts, on average, were looking for earnings of just $1.21 a share, according to a survey by Thomson Reuters.
Revenue remained flat at $39.6 billion, which was also better than Street estimates. Furthermore, General Motors affirmed its full-year profit forecast.
Sure, a beat-and-raise quarter would have been better, but this is still a solid B+ of a report.
Bottom Line on GM Stock
Demand for SUVs, pickup trucks and luxury vehicles in the U.S. and China is more than offsetting weakness pretty much everywhere else. The outlook for these two critical markets remains positive and that should drive double-digit earnings per-share growth.
And yet, GM stock changes hands at just a bit more than five times forward earnings. EPS is projected to grow 13% this year alone. Long-term growth forecasts call for compound annual growth of 20%.
That’s a ridiculously cheap stock. General Motors bulls may have to wait. We might have to get to the other side of recent macro woes.
But rest assured, at some point today’s crazy-low valuation of GM stock is going to pay off.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
