Have you missed your chance to buy General Motors Company (NYSE:GM)? Let’s hope that’s not the case, but like most stocks, General Motors stock is off to a hot start in 2018.
Excluding dividends, GM stock rose less than 1% from June 2010 through June 2017. While the automaker endured plenty of bad press (ranging from its bailout almost a decade ago to a faulty ignition switch issue), the underlying business was actually pretty good.
Both Ford Motor Company (NYSE:F) and GM have impressive bottom-line results. But because revenue growth stutters within a few percentage points of flat and the perception of “peak auto sales” haunts investors’ minds, Wall Street refuses to assign a premium valuation to either automaker.
For instance, General Motors stock trades with a forward price-to-earnings (P/E) ratio of just 7.4. Ford trades with a forward P/E ratio of just 8.25. (Ultimately, we’ve preferred GM over Ford for quite a while.)
Under the GM Hood
It’s rare to see a solidly profitable company trade with such a low earnings multiple. Another that comes to mind is Micron Technology, Inc. (NASDAQ:MU). Shares trade at just 5.5 times earnings despite its robust growth.
The automakers haven’t really gotten much love. As previously mentioned, I think it’s because of the peak auto theory. In a nutshell, it’s based on the concept that — just like Micron — Ford and GM operate in a cyclical boom-and-bust industry. And when times are good, the companies rake in billions of dollars.
GM and Ford use this money to return wads of cash back to investors in the form of dividends. Notably, each yields more than 3.5%. They also use it to invest in supply chain and assembly line improvements, as well as future technologies. Nowhere is that more evident than in the industry’s efforts in self-driving vehicles.
However, when times are bad and during recessions, automakers really take it on the chin. That’s because they have low margins to begin with and plenty of fixed costs. Because of these expenses and thin margins, they need to sell millions and millions of new vehicles in order to come out ahead.
It’s surprising just how hesitant investors have been over the years. While auto sales tend to go through a series of peaks and troughs, we’ve mostly seen sales churn near the highs. As a result, GM continues to post solid numbers and record-high transaction prices. With the amount of money it’s sending to its bottom line, investors should give GM a little more credit.
Valuing GM Stock
So if General Motors deserves to trade for more, how much is it really worth? That’s always a tough question, because it comes down to opinion. Obviously GM will never be valued like Tesla Inc (NASDAQ:TSLA).
Unfortunately, I don’t like to buy stocks based on a “rerating” theory, which is the concept that a stock should be worth more if Wall Street values it more appropriately. The reason being, what if Wall Street doesn’t do that? Then we’re left holding the bag.
In GM’s case, though, the company is buying back stock and stuffing the bottom line with incredibly strong sales. Demand remains strong as the economy continues to improve and consumer confidence runs high. Margins should increase as high demand meets rising transaction prices.
Analysts from Barclays also made a really good case for GM. Because of its Maven unit, a ride-sharing platform, it has an outlet to significantly boost the returns from its vehicles.
Instead of selling one car for $38,000, General Motors can use autonomous technologies to allow that car to act as a taxi in urban areas of the country. Despite regular maintenance on the vehicle, it could generate sales in the hundreds-of-thousands-of-dollars range. Essentially, instead of being a one-time sale, it can serve as a cash-flow business for GM.
The analyst, Brian Johnson, says a rollout starting in 2019 isn’t as unrealistic as some investors think.
Trading General Motors Stock
The driverless taxi business sounds lucrative. But it will be a little while before we see it on the streets. While General Motors stock lacks earnings and sales growth, it’s still highly profitable. Because of its dividend, buyback, big profits and low valuation, it’s a reasonable stock for some investors to hold.
But did we miss our chance to buy? If $45 acts as resistance, we’ll likely get another shot to buy GM stock on a pullback into the blue rectangle. The year has started off hot for stocks, but there will be at least a subtle pullback at some point. Let’s see if we can get one in General Motors stock before buying.