General Motors Company‘s (NYSE:GM) earnings report Thursday is critical because it’s a great opportunity for GM to quell concerns about a cyclical peak in the automobile sector.
Whether GM can pull this off is a matter of debate for analysts, whose expectations for the quarter are wildly divergent, and a huge drop in June sales complicates the picture.
GM has been chugging along on strong demand in the U.S. and China, but last month sales collapsed by 18%.
It’s not as bad as it sounds, however. Manufacturing facilities couldn’t function normally after a series of earthquakes in Japan disrupted supply chains.
It’s also important to remember that GM is also taking a hit on the top line in order to become less reliant on low-margin sales to car rental companies. It’s painful at the moment but will pay off later in enhanced profitability.
Sales actually remains close to the record sales rate recorded last year of $17.5 million even though there are fewer weekend days in 2016. Most importantly, the retreat in sales was widely anticipated by analysts and investors. Besides, it’s well understood that GM can make up for lost sales in the months ahead.
But that doesn’t mean top-line results won’t combine with cyclical fears to keep punishing GM stock.
GM Stock Needs Multiple Expansion
As we’ve written before, GM stock is a bargain. With a price-to-earnings multiple of 5.4, it’s clear investors aren’t willing to pay up for future earnings.
Sure, the outlook for profits is clouded by the fact that we may be at the car market’s top, but GM stock would appear to have already priced that in. After all, Wall Street’s five-year growth forecast is 14% per annum. That’s got to be worth more than five times forward earnings.
Furthermore, analysts see strong earnings-per-share growth for GM though this year. For the quarter to be reported Thursday, the average Street estimate stands a $1.51 a share, according to a poll by Thomson Reuters. That compares with $1.29 in the same quarter last year. For the full year, EPS is targeted for growth of more than 10%.
Revenue is seen rising just 2% to $38.93 billion from $38.18 billion a year ago.
If there’s a caveat, it’s that analysts’ forecasts aren’t clustered very tightly, which increases the odds of an earnings miss. The high estimate is $1.61 a share while the low one stands at just $1.31.
Moreover, a dramatic slowdown in EPS growth is expected in fiscal 2017. That’s what’s keeping a lid on the multiple.
But if you’re a value investor, you have to look past this year, the next year and even the one after that. Yes, it’s a cyclical business, but the cycle runs two ways and the five-year outlook is very robust.
GM stock is down more than 7% for the year-to-date and the earnings report isn’t going to change that. Take a longer view, however, and this is a name that will reward patience.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
