The bull case on General Motors Company (GM) is getting harder to ignore after GM reported blowout quarterly earnings even amid fears of an industry-wide slowdown.
General Motors stock would be doing better if not for concerns that demand in the automobile sector is at, or close to, its cyclical peak. That’s what keeping shares down even as profits and sales keep roaring ahead.
Well, if the cycle is slowing, there sure was no evidence of it in General Motor’s most recent quarter.
GM’s profit more than doubled on record earnings in North America and continued strength in China, even though slower economic growth is supposed to put a hurting on the world’s largest car market. Europe, long a sinkhole for General Motors, almost broke even. Even South America, which is in a serious funk (thanks, Brazil), posted a narrower loss.
Maybe it’s time to give GM stock the benefit of the doubt?
For the most recent quarter, General Motors said earnings came to $1.95 billion, or $1.24 per share. On an adjusted basis, which is what the market cares about, profit was $1.26 a share. Analysts on average were looking for earnings per share of $1, according to a poll by Thomson Reuters.
That’s a really big earnings beat and represents the fourth consecutive quarter in which GM has surprised to the upside. Not to be outdone, revenue came to $37.3 billion, well ahead of Wall Street’s forecast for $35.41 billion.
GM Stock Is a Bargain
At some point one would hope that the market would get over its fears of a slowdown. No, past is not prologue, but cheap gas coupled with an insatiable appetite for SUVs and pickup trucks shows no signs of letting up. Last year, the U.S. market recorded a record 17.5 million new car sales.
And now General Motors is off to a good start in 2016 too. On a global basis, GM sold 2.36 million vehicles in the first quarter. And even though volumes declined, a focus on higher prices let GM boost its margins. That’s encouraging for anyone worrying about hits to profitability from incentives and fleet sales.
Yet the market remains highly reluctant to reward General Motors stock — or Ford Motor Company (F) stock — with any kind of multiple expansion. Well, so much the better for value investors, because GM looks cheap. Arguably, shares already reflect the risks of a cyclical slowdown.
GM trades at less than six times forward earnings. That’s almost 25% below its own five-year average and is roughly two-thirds cheaper than the S&P 500, according to data from Thomson Reuters.
At the same time, GM has an expected long-term compound annual growth rate of more than 16% per annum, analysts say. The broader market has a growth rate of only 5% and change.
The thing is, there’s no sign of a slowdown and GM looks prepped for that inevitable occurrence anyway. We’re not talking about the same-old GM. U.S. car manufacturers are more nimble and cost constructive than ever. Just look at GM’s margin expansion.
At some point subdued sentiment will change on General Motors stock and that’s when patient investors will be happy they bought now.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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