Unless something truly horrible comes out when General Motors Company (NYSE:GM) reports earnings Tuesday, it doesn’t really matter what the automaker says, because GM stock will still be a buy.
Yes, it’s that deeply undervalued.
General Motors stock is down roughly 6% for the year-to-date. Sentiment on the name is so dim that shares — currently priced at about $32 — haven’t smelled $33 a share since last year. Take a step farther back and you’ll see a stock that has been range-bound since 2013.
GM stock can never seem to gain traction. Even when it was posting record results during one of the best cyclical upswings the industry has ever seen, it got too little respect.
Now that the cycle has stalled out, General Motors gets no appreciation at all, which is so much the better for value investors. The investment thesis on GM stock is simple. As JPMorgan analysts say, General Motors stock offers “deep value.” That’s why they rate it at “Overweight” (buy, essentially.)
Interestingly, half of Wall Street shares JPMorgan’s perspicacity. Of the 20 analysts covering General Motors stock, 10 call it a buy and 10 have it at hold, according to a survey by Thomson Reuters. Yet it continues to go nowhere even though production actually tracked stronger during the most recent quarter.
That alone should help General Motors top analysts’ average estimate on Tuesday.
GM Stock Is a Patient Income Play
For the most recent quarter, analysts on average expect GM earnings to come to $1.44 a share, down from $1.50 in the same period last year. Revenue is forecast to grow just 1.2% to $39.29 billion.
So what’s so sexy about declining profits and flat revenue growth? Not much, until you look at how much GM stock already reflects this slowdown — and then some.
One astute InvestorPlace commenter noted that GM’s forward price-to-earnings ratio of just 5.6 “bakes in a lot of stupid.” That’s exactly right. Investors are already treating GM as if it fell apart.
Which is strange considering that the Street is pretty optimistic about General Motor’s growth prospects. Analysts’ average compound annual growth forecast stands at more than 10%. And that includes the effects of slower demand for vehicles. Ordinarily a stock trades at a premium to its long-term growth forecast.
Furthermore, based on September’s sales figures, General Motors is holding its own. Total unit sales fell less than 1% last month vs. the year-ago period. Total unit sales are off 3.8% for the year-to-date.
Sure, the stock needs to reflect this hardly apocalyptic slowdown, but it has simply gone too far.
GM really could use a better-than-expected quarter right about now. Perhaps it will bring at least some investors around to the realization that it has been overly discounted for its growth trajectory. And that’s before accounting for the dividend, which yields 4.77%. That’s a considerable return for an income investor in this ultra-low rate environment.
The bottom line is that General Motors stock has an unusually generous dividend and trades at a bargain price. That’s a formula for outsized total returns, but only if investors maintain long horizons.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
