General Motors Company (NYSE:GM) stock dropped sharply recently even though the company’s performance last month in China — the world’s largest auto market — was very impressive. Meanwhile, General Motors’ North America business is holding its own and beating the company’s guidance. As a result, the recent decline in GM stock, which has a very low valuation, has created an extremely attractive buying opportunity for investors.
General Motors stock has fallen nearly $2 per share, or about 5.5%, since General Motors reported March U.S. sales that came in below expectations.
The company’s U.S. sales rose just 1.6% compared with the same month in 2016. But the report certainly wasn’t dismal, as General Motors’ total sales volume did rise, while its retail sales, which carry higher margins than fleet and government sales, climbed 5%, and sales of high margin GMC SUV’s and crossovers surged 12%. Additionally, sales of the company’s expensive Buick cars jumped 22% year-over-year.
GM Stock and the China Rebound
But more importantly, General Motors’ sales in China last month were stupendous and bode very well for the longer-term outlook of GM stock. Specifically, the company’s sales volume surged 16% YOY to 345,448, which represented a record for the month of March. Furthermore, General Motors achieved its largest 12-month sales increase in China since August 2016. Additionally, the surge indicates that, after the company suffered two months of weak sales following a sales tax increase in January 2017, Chinese consumers are ready and able to buy GM vehicles in droves again.
Furthermore, sales of General Motors’ SUVs in China jumped 48%, while sales of its multi-purpose vehicles i.e., minivans surged 63%, and sales of its luxury Cadillac vehicles skyrocketed 63%. The tremendous popularity of its most expensive vehicles in China should significantly boost the company’s profit margins in that country and put upward pressure on its overall margins going forward.
GM: Beating Guidance, Analysts’ Outlook
The strong rebound in China also looks poised to raise the equity income that General Motors receives from its joint ventures in the country, thereby enabling it to exceed its 2017 guidance and the consensus 2017 earnings-per-share estimate.
In February, GM had predicted that its sale mix in China would improve this year, i.e., it forecast that it would sell more SUVs, minivans and luxury vehicles in the country in 2017 than in 2016, causing its margins to increase this year.
However, General Motors also predicted that its overall sales volume growth in the country would fall below last year’s 7% increase . If the trend seen in March continues, that estimate will obviously prove to be quite conservative.
And General Motors was not very upbeat about the outlook for its North America business in February, predicting that sales in the region would drop year-over-year and that its margins in North America would be flat in 2017 versus 2016. So, after GM’s U.S. sales rose 1% in the first quarter, with favorable mix changes last month, the company looks set to exceed its guidance in North America.
Bottom Line on GM Stock
With General Motors’ two largest markets beating the company’s outlook recently, its 2017 EPS guidance of $6 to $6.50 is looking pretty conservative. And analysts’ consensus estimate of $6.01 is looking conservative.
Similarly, GM stock looks quite undervalued at current levels. It’s trading at about 5.5 times the conservative forward-price-to-earnings estimate. Conversely, Ford Motor Company (NYSE:F) is trading at a forward P/E of 6.9. Moreover, GM’s price-to-sales ratio is 0.3, versus 0.4 for Honda Motor Co Ltd (ADR) (NYSE:HMC) and 0.6 for Toyota Motor Corp (ADR) (NYSE:TM).
With surging sales in China, a North American business that’s beating low expectations and an undervalued stock that declined recently, General Motors is definitely a great investment right now.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.