General Motors Company (NYSE:GM) hasn’t been on the receiving end of good news when it comes to the escalating trade tensions between the U.S. and China. In the early goings, one of the first issues that came up was steel. Some analysts said higher steel costs could hit GM’s bottom line by as much as $1 billion. It’s little surprise that General Motors stock has not responded well to these types of analyses.
Other input costs and tariffs could negatively impact GM, Ford Motor Company (NYSE:F), Toyota Motor Corp (ADR) (NYSE:TM), Honda Motor Co Ltd (ADR) (NYSE:HMC) and others as well. Although recent comments from China’s Xi Jinping suggests the automakers might be on the receiving end of some good news — another reason to consider GM stock.
Infrastructure Boost for GM Stock
Well-known auto analyst Adam Jonas out of Morgan Stanley upgraded GM stock to outperform from equal weight. He did so on the premise that the automaker will have positive earnings revisions “as investors better understand the impact on U.S. pick-up truck sales from a potential passage of a U.S. infrastructure bill.”
Jonas also believes that Ford and Fiat Chrysler Automobiles NV (NYSE:FCAU) will benefit as well. The infrastructure bill, which could climb as high as $2.4 trillion over a 10-year period, would spur increasing sales of the highly profitable pickup truck.
One could reasonably argue that Ford would be the big winner here, given that the F-series has been the best-selling vehicle in the U.S. for several decades. Worth pointing out is that Jonas has a buy rating on Ford stock from March 21st and a $15 price target, which is the highest estimate on Wall Street.
Jonas bumped his price target on General Motors stock to $48 from $45, while the highest on Wall Street sits at $70, assigned by Citigroup in mid-February. While it would require an 85% rally in GM stock price, it would mean shares trade at — get this — just 11 times 2018 earnings estimates.
Valuing General Motors Stock
Shares currently pay out 4% annually, but for some, the dividend isn’t a driving point. Perhaps they’d care that GM stock trades at less than 6 times 2018 earnings. However, the valuation comes with its own caveat as well: growth is nil.
Consensus expectations call for a 90 basis point decline in revenue this year, followed by a slight 0.5% sales gain the following year. Earnings per share is forecast to slip about 4% this year, followed by flat growth the following year.
It’s one of the lowest valuations in the S&P 500, sort of like Micron Technology, Inc. (NASDAQ:MU). Only unlike GM, MU stock has plenty of growth in its future.
That’s one thing that makes General Motors stock such a tricky investment. The economy isn’t showing any cracks, so a recession isn’t a big concern. 6 times earnings is cheaper than dirt cheap, but when there’s no growth in sight for almost two years (at least), investors feel little reason to gobble up the stock.
One catalyst? Self-driving cars. Many analysts don’t see 2019 as a realistic time frame, but management has indicated it’s possible. In a nutshell, GM wants to deploy a fleet of fully autonomous taxis in dense urban environments. Rather than a one-time sale (with an average transaction price in the upper-$30,000 range), GM says the service can generate hundreds of thousands of dollars in revenue per unit.
If that’s true — and again, this could be a few years out, realistically — then General Motors stock would be in for a major re-rating. Because of this top- and bottom-line booster, it would deserve a higher valuation and be less cyclically driven. Then I could see a reasonable case for 11 times earnings and a share price like Citigroup’s price target.
If they hold and the broader market rallies, a move back into the $40s is reasonable for GM stock price.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.