A few weeks ago, I wrote a bearish article on General Motors Company (NYSE:GM). I always try to be fair-minded when I am looking at a company and a stock, so I thought I should present the bull side for General Motors stock.
The valuation on General Motors stock is somewhat low. General Motors stock is trading a little under 6x 2017 earnings. Revenues did fall in 2017, but by only 2.5%. Income from continuing operations grew. Cash flow has been strong enough that jam stock has repurchased almost one-fourth of its outstanding shares, and when combined with dividends, amount to some $25 billion being returned to shareholders.
Cash flow from operations alone in 2017 was $14 billion. GM stock has cash and investments now of $24 billion. That’s quite a change from 10 years ago at the depths of the financial crisis.
I think some investors are skeptical about the sustainability of the 4% yield, but at the moment it looks like there’s enough cash flow to cover.
Crossover Sales Driving General Motors Stock
In my bearish article, I highlighted that there are real concerns with year-over-year car sales declines across the entire industry. However, I did point out that both pickups and crossovers were bright points.
Indeed, GM delivered year-over-year sales growth of 15.7% in March, selling just under 300,000 vehicles compared to 256,000 in the same month last year. Analysts and only expected a 3.6% increase, so this is a pretty astonishing beat.
It’s really the crossover sales that are driving General Motor’s stock now. Chevrolet crossover sales were up 39%, GMC’s were up 42% and Buicks were up 50%.
GM has stopped reporting monthly sales. I think this is a really big mistake. While management claims that quarterly reporting is going to give a better idea of how sales are doing, what trends are, and so on, the bottom line is this amounts to reduced transparency.
In my book, the only reason to reduce transparency is because you have something to hide. Yes, arguably, reducing transparency might lead to less volatility for General Motors stock. However, management’s first obligation is to give us frequent reporting on the business, not manage stock volatility.
Back to the bull argument, I do think that GM is looking at reducing some of its makes if they are underperforming. The company is going to stop producing the Chevy Sonic, and it sounds like the Chevy Impala may also be discontinued.
Bottom Line on General Motors Stock
This just is a natural response to the move toward SUVs. As people moved to SUVs, it’s unlikely that they will be moving back towards the typical standard passenger car.
Although I consider electric vehicles to be little more than a scam being perpetuated on “environmentally conscious consumers,” that doesn’t mean that they aren’t and won’t be successful parts of the business. The amount of energy consumed to create the batteries for electric vehicles is substantial, and the corresponding higher prices for electric vehicles and hybrids, support that argument.
But it doesn’t matter. There is demand for these vehicles, and GM is going to be introducing at least 20 of them by 2023.
So there’s your Bull Case. I personally want nothing to do with General Motors stock, and let’s not forget the billions in underfunded pension liabilities that still exist, not to mention the health of GM Financial. I would personally advise that you look elsewhere.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. Meyers is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
