It wouldn’t be surprising to see General Motors Company (GM) pop up as a buy recommendation from multiple investment analysts. Over the past two months, GM stock is up 11% in the markets, and is priced at 5 times trailing-12-month earnings, a fairly nice discount against rival competitors Ford Motor Company (F) and Toyota Motor Corp (ADR) (TM).
Add to that a generous dividend yield of nearly 5% and General Motors has the look of one of the great undervalued opportunities available in the markets today.
So how come more people aren’t jumping on board?
General Motors Tailwinds
On the surface, most fundamental factors appear very supportive of GM stock. General Motors head executive Mary Barra has made it no secret that she’s banking on China — the world’s biggest market for automobiles — to provide long-term growth for the company.
To that effort, GM is producing the Buick Envision. According to Fortune, the Envision is the “first mass-market vehicle made in China that will be sold in the U.S. market.” As luck would have it, China’s gross domestic product increased on a year-over-year basis by nearly 7% in the first quarter of 2016, avoiding doomsday prognostications.
Then there is the matter of gasoline prices. Although Brent Crude Oil has jumped 55% since hitting bottom in the markets earlier this year, the index is still well off its peak price point. In addition, the Doha meeting among major oil producers to coordinate oil supply cuts was a failure.
As predicted by anybody watching developments in the Middle East, the conflict between Saudi Arabia and Iran shuttered any realistic hope of an agreement.
Theoretically, this should be a very big boost for GM. While cheap gas prices aren’t exactly a panacea for the automotive industry at large, there’s evidence that GM in particular is actually a beneficiary.
Since the start of 2015, light truck sales in the U.S. have risen noticeably. Last month, General Motors sold nearly 48,000 Chevrolet Silverados, an increase of 6% year over year. It was also the second-most-popular vehicle overall in March, behind the Ford F-Series pickup trucks.
With that in mind, Wall Street is optimistic towards General Motors’ first quarter of fiscal year 2016 earnings report, slated for Thursday. Consensus for earnings per share lands at $1.01, a modest four-cent increase over the EPS target a year prior.
Combined with cheaper gas prices, benchmark interest rates have dropped significantly since the beginning of this year. That should help to juice up Q1 sales for GM, and to potentially offer an earnings beat.
GM Stock’s Flip Side
The issue, though, is that investors may not like the long-term picture. While light truck sales are up, volume for passenger cars have been steadily declining since 2014. In March, virtually every size car model witnessed a sharp drop-off from the year-ago level.
Worryingly, sales of large cars — which are typically higher-ticket items — tanked by 38% YOY. Luxury cars saw a 12% YOY decline.
For GM specifically, U.S. car sales performance is a kiss of death since Americans overwhelmingly prefer models produced by rivals TM, Honda Motor Co Ltd (ADR) (HMC) and Nissan Motor Co Ltd (ADR) (NSANY).
China isn’t exactly a snag-free solution, either. Aside from the fact that General Motors will face fierce competition in the world’s second-largest economy, both GM and Ford recently posted disappointing sales results there. That confirms fears that China’s credit expansion efforts have only stimulated investment markets as opposed to domestic consumption.
Tellingly, the price of homes sold in China surged 71% YOY in March. Fortunately, nothing bad ever happens when real estate valuations nearly double while the underlying economy grows at a more modest pace.
But perhaps the biggest indictment against GM stock is its performance in the markets. If General Motors is so undervalued, what explains the lack of sustained upside momentum?
Since June 2013, the average closing price of GM stock is roughly $32.50. Unless you perfectly timed every dip and turn of GM, shares have simply moved sideways. The low price-to-earnings ratio for GM is really a sign of no confidence. General Motors is a quality company, but most folks just don’t see growth potential.
It’s hard to blame the naysayers. Outside of light trucks, U.S. car sales have definitely hit a plateau. Even if they hadn’t, GM faces considerable competition from both domestic and international automakers.
Adding to those challenges is General Motors’ China strategy, which is starting to show cracks in its previously assumed unassailable armor.
Ultimately, though, money talks. And unfortunately for GM stock, most of what they hear is silence.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
