General Motors Company (GM) Stock Is a High-Income Buy on Q1 Beat

GM stock and its 4%-plus yield offer a compelling risk/reward setup after its strong earnings report

General Motors Company gm stock

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General Motors Company (NYSE:GM) is merely idling after a strong Q1 earnings report Friday morning, but that’s what investors have come to expect of late. While there are certainly worse performances than the 1% decline in GM stock so far in 2017, that’s nothing to write home about.

General Motors (GM) beats Q1 estimates
Source: Shutterstock

Perhaps it’s because auto sales are struggling to break to new highs. Maybe it’s from the recent guidance cut of Ford Motor Company (NYSE:F) — a stock we deemed a value trap.

However, while Ford recently cut its guidance, GM did the opposite. Earlier this month, General Motors said it expects full-year earnings per share to come in between $6 and $6.50. Meanwhile, GM stock yields 4.4%, and it’s coming off yet another strong report.

What gives?

General Motors Q1 Earnings

On Friday, General Motors reported fiscal first-quarter results and management didn’t disappoint. Earnings of $1.70 per share came in 24 cents per share ahead of estimates. Revenue of $41.2 billion grew 10.5% year-over-year, topping estimates by $450 million.

The quarter was loaded with positives: record first-quarter revenues, EBIT-adjusted margins (8.2%), earnings and North American sales, among others. The company also notched a new record (among any quarter) for GM Financial, which saw sales of $2.9 billion soar 38.7% year-over-year. Net income climbed 33.5% to $2.6 billion.

If you need me to say it, I will: These are really impressive numbers.

Analysts expected revenue growth of 8.2% this quarter, which GM beat by plenty. However, for the full year, analysts still believe sales will fall 2.2%, and analysts only expect $6.01 per share in full-year earnings — that’s at the bottom of management’s range.

If General Motors is showing us anything, it’s that analysts continue to underestimate the automaker. EPS of $1.70 came in 16% ahead of estimates. Full-year results could be similar.

Yet, as of Friday’s premarket trading, GM stock was up by less than 2%. And it’s not because General Motors is too frothy — the company currently trades at a price-to-earnings ratio of just 5.75, and it’s even smaller on a forward basis!

While General Motors has a lot of positives, the market stubbornly refuses to see growth.

How to Deal With GM Stock

We can debate all day about whether General Motors deserves to trade with this low of a valuation, but deserve rarely has anything to do about it.

My thought? Income investors should love GM. The stock yields 4.4% at current prices, and its uber-low P/E ratio practically ensures you’re not overpaying. Yes, a recession or weakening auto sales will hurt General Motors, but for now, “peak auto” might look more like a gradual, plateauing hump rather than a distinct peak.

GM stock chart view 1

The charts are also setting up nicely.

For those looking to buy GM stock now, there’s a trendline of support just below General Motors at the moment. Also, the 200-day moving average is just below shares, too, and that should act as additional support. Finally, the $34.50 area has acted as both support and resistance over the previous two years.

With GM over all three of these levels (as of the pre-market) we could use a stop-loss of about $33 to $33.50, which is just below all three levels.

But if you’re looking on the upside, a bounce off this area could spark a run toward $38 — a nice 10% pop to go along with a strong buy-and-hold dividend.

Bret Kenwell is the manager and author of Future Blue Chips. He can be contacted on Twitter via @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/general-motors-company-gm-stock-is-a-high-income-buy-on-q1-beat/.

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