General Motors Company: Auto Sales Peaked, But GM Is Still a Buy

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2015 was a record year for new car sales, with sales of 17.5 million vehicles. After weak U.S. new car sales data in March, the annual adjusted rate of new car sales for 2016 is slightly higher than 16.5 million.

General Motors Company: Auto Sales Peaked, But GM Is Still A BuyThis data suggests that consumers will buy one million fewer cars than last year, which also suggests that last year’s record year might have been a peak.

As a result, investors might be compelled to sell or avoid auto stocks. While fine, the one stock that investors should not sell is General Motors Company (GM).

The Obvious Reasons to Own GM

GM stock is high on a lot of investors’ radar right now, after the company reported a solid first quarter with 4.5% revenue growth and a profit that doubled from last year. Still, despite trading higher, GM stock is still priced as a company that is in deep turmoil.

If we assume that GM hits its full-year EPS target of $5.65 excluding one-time charges, then it trades at less than 6x this year’s EPS. That makes GM stock one of, if not the cheapest company of such size, a clear reflection of the pessimism and overall hesitation that investors have of putting money in the auto industry.

This degree of value coupled with its recent strong earnings performance and a 4.7% dividend yield are all obvious reasons to own GM. Sure, auto sales may have peaked last year, but as executives noted in the conference call, GM is capitalizing in the SUV and luxury markets, and also in markets outside the U.S. such as China and Europe. Collectively, this makes GM more attractive.

What Separates GM Stock From the Pack

While valuation, dividend and growing market share are obvious reasons to own GM stock, the biggest reason is in fact the investments that General Motors is making in the future. Fact is, the auto industry is changing fast, and the companies who are leading this innovation are already commanding very lavish valuation, such as Tesla Motors Inc (TSLA) and Uber.

As a result, GM has made a bunch of low-risk, high-reward investments over the last year that position it perfectly to capitalize on the potential that surrounds ride-sharing, rent vs own or lease, and self-driving cars with an investment and partnership with Lyft.

These moves cost the company very little, but with many consumers electing to ride share versus own cars in major cities, and research showing that consumers would prefer to rent versus own or lease, GM has identified areas of the market where it is best positioned to succeed.

Meanwhile, GM’s major competitors have elected to ignore these opportunities in favor of electric cars. Given that electric cars have never, not once, been a profitable business, and require significant increases to capital expenditures for charging stations and battery production, it would certainly seem that GM made the right decision for where to invest.

At the end of that day, it’s that wise decision on where to invest that solidifies the investment value in GM stock, and is why investors should not fear what seems like peaked auto sales in North America.

As of this writing, Brian Nichols owns shares of General Motors.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/04/general-motors-gm-still-buy/.

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