Contrarian investments are always interesting, and it doesn’t get much more contrarian than buying General Motors (NYSE:GM). The stock is down 43% from its year-to-date high and off about 29% from the $32 level it touched briefly in early July. Faced with slowing economic growth, weaker global auto sales, and ongoing concerns about its pension liabilities, GM has been under relentless selling pressure for most of this year. However, the combination of steady growth opportunities and an incredibly low valuation means that it’s time to take another look at this stock.
First, as Susan Aluise wrote over the weekend, GM is making important strides in reviving its brand. And consumers appear to be taking notice — the company’s sales rose 18% year-over-year in August, and its compact model — Cruze — was the bestselling compact car in America in July.
Second, GM continues to benefit from opportunities overseas. While auto sales in China have slowed significantly in recent months — one of the most important factors in GM’s weak stock price — the company retains the No. 1 position in this large (and still-growing) market. Even as auto sales decelerated in the first half of the year, GM sales in China nevertheless rose by 5.3% as it took share from lower-quality competitors.
It’s apparent that GM is holding up well through the downturn, which bodes well for when the world auto market finally picks up gain. GM’s improved financial and operational position should allow it to capitalize on any recovery, a sentiment expressed by CEO Dan Akerson in an interview last month with China Daily, in which he stated: “GM can be even more profitable when car and truck sales recover across the globe; when the market does recover, we should be able to really leverage it beyond what you’ve seen so far.” Indeed, auto sales in China are expected to rise from 10.4 million now to 25 million by 2020, at which point Asia as a whole is projected to account for 65% of world auto sales.
Despite these positive developments, GM is trading at a rock-bottom valuation. Its price-to-earnings is just 4.9 times estimated 2012 earnings — a price/earnings-to-growth ratio of 0.43 — but this doesn’t account for the $13.25-per-share net cash on its balance sheet. That places the value of its entire auto business at about $6.50 per share, not far above the average estimate of $4.61 earnings per share in 2012. In comparison, the average P/E of Ford (NYSE:F) — and the ADRs of Toyota (NYSE:TM) and Honda (NYSE:HMC) — is 9.
If GM were to trade even halfway from its current valuation to the category average (which would be a P/E of 6.95), it would be worth $32 per share. At the category average, it would be valued at about $41.50. The current average analyst price target is $41.19. Standard & Poor’s is among those with a positive view on the stock.
Having said all of this, it’s difficult to see GM rallying as long as concerns about global growth continue to haunt investors. The entire auto sector has been pummeled in the past two months, and valuations can certainly fall further if the broader market weakens into the autumn. Still, the combination of improving growth, an extremely cheap share price, and poor recent performance means that the upside opportunity outweighs the downside risk by a comfortable margin — especially if you have the capacity to hold on for 12 to 24 months as this story fully plays out.
