GM’s (GM) largest auto market, China, has rebounded tremendously recently, even as the company’s second largest market, the U.S., is setting sales records.
Despite the automaker’s huge turnaround in China and the extremely strong U.S. auto market, GM stock is only up 2% year-to-date. While that technically outperforms the S&P 500, it doesn’t especially feel like something to be excited about.
Eventually, when macro fears calm and market volatility eases, investors will realize that GM stock deserves a much higher premium, given the formidable robustness of its business in its two largest markets. When that happens, GM stock will rise significantly.
Just a couple of months ago, automakers were nervous about the Chinese market. General Motors was not immune from the downturn, as its sales in the Asian country dropped 3.9% in September, even though ts SUV sales continued to surge tremendously.
However, Beijing intervened with a game change, cutting the sales tax on small vehicles from 10% to 5% in October. Noting that the tax cut is slated to remain in effect through the end of 2016, Barron’s reported that Credit Suisse responded to the news by upgrading its ratings on the Chinese auto sector to “overweight.”
The upgrade was proven to be justified, as sales of Chinese autos jumped 13% in October, reaching their highest level this year. Participating in the party in a major way was GM, whose auto sales in China jumped a record 15%.
General Motors obtained 44% of its profit from China last year, so the turnaround there is definitely going to have a gigantic impact on GM’s bottom line.
GM Stock Still Waiting to Reflect Success at Home
The continued strength of the U.S. market will probably also boost General Motors’ profits.
In September and October, U.S. auto sales reached 10-year highs and exceeded all expectations in October, driven by resilient consumer spending. GM’s sales in its home market rose 16% last month versus the same period a year earlier, easily surpassing analyst estimates of 12%.
Some have expressed concern over the decline in total spending at American car dealers in October. Marketwatch writer Steve Goldstein blamed the downturn on higher discounts being offered by automakers. According Goldstein, “the prospect of higher interest rates, of slowing employment gains and tighter lending all could help puncture the auto boom.”
But these concerns seem off-base, at least in the short and medium terms. Interest rates aren’t going to rise meaningfully anytime soon, so credit shouldn’t tighten significantly in the next six months. Additionally, as more Americans hear that interest rates could increase soon, more of them may look to buy cars before the rates do really start to climb meaningfully.
And U.S. nonfarm payrolls accelerated significantly in October from September, coming in at a fairly health 271,000.
Jessica Caldwell, the director of industry analysis at automotive research site Edmunds.com, was recently quoted as saying that the auto companies may be offering discounts in order to attract younger car buyers. According to Marketwatch interviewer Kathleen Burke, “Caldwell says that this is also an important time for auto makers to attract new and younger customers who will return a few years down the line when leases expire,” the website explained.
In any event, the increased promotions don’t change the fact that the outlook in GM’s two largest market is exceptionally bright. However, GM stock isn’t yet adequately reflecting that reality, so investors should buy in while they’re still getting a discount.
It also doesn’t hurt that GM stock will pay you with a 4% dividend yield to wait for the rally.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
