A beat on the top and bottom lines in fourth-quarter earnings by General Motors Company (NYSE:GM) still sent GM stock falling 3.3% last week, suggesting investors are still pessimistic about the company’s ability deliver on its 2017 promises. GM stock declined as much as 5.3% immediately on the quarterly results, netting the automaker’s largest one-day decline in almost a year.
But now’s the time to bet on GM stock, which is still trading below its December 2013 high of $41.
I’ve always believed the pessimism shown towards GM and Ford Motor Company (NYSE:F), which both trade at dirt-cheap valuations, were too irrational. In the case of GM stock, the shares closed Friday at $35.17, down more than 7% over the past month. The shares are now priced at forward price-to-earnings ratio of just 5.7 based on fiscal 2017 estimates of $6.08 per share.
The discount on the Detroit-based carmaker is even more glaring on the heels of its revenue and earnings beat. General Motors guided for full-year 2017 earnings of $6 to 6.50 per share. Add in the company’s 38-cent-per-share dividend, yielding 4.3% annually, and an investment in General Motors looks like a no-brainer.
The company reported adjusted earnings of $1.28, beating Thomson Reuters consensus of $1.17 per share, while GM’s quarterly revenue of $44 billion also topped the $40 billion analysts were looking for.
Why the decline? Investors continue to be worried by so-called peak U.S. auto sales, which came in lower than expected in January. But that’s not a surprise. January is notoriously a slow month for the industry. And then there’s the notion that GM earnings have also peaked, according to Efraim Levy, an analyst with CFRA.
What’s more important to consider, however, are the moves General Motors has begun to make to offset peak auto sales and boost profit margins. And while the company’s ability to execute on its 2017 revenue and inventory guidance amid peak auto seems risky, GM is positioning itself to deliver.
To grow revenue and earnings and fend off the competition, General Motors says it will redesign for some key SUVs this year, which is a wise move given that SUVs and pickup trucks continue to dominate U.S. sales. This is in addition to suspend production in an effort to draw down its inventory.
These moves, while they won’t immediately show up on the bottom line, are worth taking a chance on. Again, at a forward P/E of less-than 6, where’s the risk? The S&P 500 index trades at a forward P/E of 19. This explains why analysts at Morgan Stanley kept General Motors as their top pick among auto makers. The company’s 2016 results “give us improved confidence in GM’s ability to deliver the top end of the range of its 2017 guidance,” the analysts said.
It would seem, Morgan Stanley thinks — as I do — that GM stock deserves a higher multiple.
Bottom Line for GM Stock
It’s now time to shift gears when looking at GM stock, which deserves a greater vote of confidence. From my vantage point, GM stock deserves a reasonable, yet discounted, forward P/E of 7, which puts the shares right around $42. GM´s businesses, which is generating tons of cash, should remain relevant and profitable for longer than the market thinks.
And with the company’s increased ability to return cash and nurture new businesses such as autonomous vehicles, it’s not a matter of “if” GM stock will reach $42, it’s a matter of “when.”
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
