General Motors Company (NYSE:GM) has certainly made a tremendous comeback since 2008, after having to declare bankruptcy. But there has been little for investors to cheer about. Back in late 2010, the company pulled off its IPO at $33 a share. But now GM stock is at only $37.20.
To put things into perspective, InvestorPlace.com’s Dana Blankenhorn has noted: “Ever since the 2008 crash and government bailout, General Motors stock has been treated like dirt. No matter what GM does, it can’t get out of first gear.”
I actually think this is an understatement!
Of course, Wall Street can be inexplicable. Yet eventually investors will recognize the value. Hey, this has happened with other stocks that languished for a long time, such as Microsoft Corporation (NASDAQ:MSFT), right?
OK then, so would GM stock be a good play right now? Or should investors hold off? Well, to see, let’s take a look at 3 pros and cons on General Motors:
3 Pros On GM Stock
Momentum: For the past two years, General Motors has posted record earnings, net revenues, EBITDA and free cash flows. As for last year, revenues increased by 9.2% to $166.4 billion and free cash flows came to $6.9 billion, up $4.7 billion from the previous year.
Then again, General Motors has continued to pump out popular cars, with global sales at 10 million (making the company the No. 3 player). A big part of this has been the continued success in North America. But of course, China remains a major factor as well. Last year GM reported 3.87 million car sales in the country. Keep in mind that the company sells more in China than any country, including the U.S.
But GM has also been judicious with discounts and promotions. For the most part, GM is focused on making sure it makes profits, not just on increasing marketshare.
Innovation: One of the hottest categories in technology is the auto industry, as seen with the efforts with operators like Alphabet Inc (NASDAQ:GOOGL, NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL) and Tesla Inc (NASDAQ:TSLA). The good news is that GM has been ramping up its investments. To this end, the company made a $500 million investment in Lyft (a top ride-sharing startup) as well as a $1 billion acquisition of Cruise Automation (a developer of autonomous car systems).
Already there are signs that GM is getting traction. For example, the company is testing over 40 autonomous Bolt EVs. But there are also some other innovations, like Maven. This is a mobile platform that allows a person to search and reserve a car and unlock it with a smartphone. According to GM: “With more than 25 million customers around the world projected to use some form of shared mobility by 2020, Maven is a key element of our strategy to changing ownership models in the automotive industry.”
It’s important to note that GM has the advantage of leveraging its experience with OnStar, which has been around for two decades. In fact, during this time, the system has logged about 1.5 billion customer interactions.
Yield & Valuation: GM has certainly been shareholder friendly. Last year, the company returned a hefty $4.8 billion — in a combination of share buybacks and dividends. In fact, GM stock has a nice yield of 4.1%.
But the valuation is also attractive. Consider that the forward price-to-earnings ratio is at a lowly 6.1X. True, this may be deserved for a company that is showing declining growth. But as for General Motors, the company expects to increase the top line for 2017.
In other words, the stock does look like a great value play right now.
3 Cons on GM Stock
Competition: The environment is brutal. And with more dealmaking, things will only get more intense. An example of this is the alliance of Renault SA and Nissan Motor Co Ltd (ADR) (OTCMKTS:NSANY) — which also involved the purchase of a large stake in Mitsubishi Motors. With this, the companies were able to realize significant cost savings and also hit a global sales number of nearly 10 million last year.
Although, according Fiat SpA (ADR) (OTCMKTS:FIATY) CEO Sergio Marchionne, an automaker may need to reach levels of 15 million cars sold annually to be competitive! The reason is that R&D will inevitably increase because of the enormous costs of new technologies.
As a result, a company like GM may have little choice but to look for a similar alliance or a transformative acquisition, which would definitely be risky and expensive.
Politics: The election of Donald Trump is a wild card for the auto industry. On the one hand, there are potential positives, such as with lower corporate tax rates and less onerous regulations.
But these may not offset the issues with Trump’s anti-trade bent. If there is a border tax, this could hurt GM because of its substantial production in Mexico. Actually, about 20% of light production is in the country. So if there is a border tax, it could mean higher prices in the U.S. — and yes, lower sales. According to the Wall Street Journal: “Even a more modest border tax under consideration would wipe out a quarter of GM’s regional profit.”
Global Issues: While the markets in China and North America have been robust for GM, there has been much softness in many other areas, such as in Europe and South America. Granted, there are signs of improvement – but the progress has been fairly slow. For example, in South America, GM has been able to cut back on the losses. But there was still $374 million in red ink last year.
As for Europe, the growth has been sluggish across the continent. It also does not help that England has enacted the Brexit, which has caused a lot of uncertainty. As a result, GM lost $300 million in Europe last year and it appears there will not be break-even until 2018. To put things into perspective, the company has not seen a profit in the region since 2000!
Bottom Line On GM Stock
Perhaps the biggest issue facing GM stock is the uncertainty regarding Trump’s trade actions. Although, given the importance of the auto industry to the US economy, it does seem reasonable that any moves will likely be taken with care. Besides, General Motors CEO Mary Barra has been savvy to meet with Trump several times already.
In the meantime, she is doing a great job managing the core operations of the company. Note that there will be 18 new or refreshed models for five main brands in 2017, up from 13 last year. And yes, Barra has been aggressive with investments in new technologies.
OK, so is GM stock a good buy right now? I think so, especially given the rock-bottom valuation.
Tom Taulli runs the InvestorPlace blog IPO Playbook and also has his own free iOS app to estimate your tax refund, which is at PathwayTax.com. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.