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Why General Motors Stock Is Stuck in No-Man’s Land

A little less than five years ago, shares of General Motors (NYSE:GM) were trading hands around $37. Ever since, the stock has dropped as low as $27, and rallied as high as $45. Ultimately, though, GM stock hasn’t moved much over the past five years. Today, it’s around $38.80.

GM logoGM stock hasn’t climbed much for one simple reason: its profits and revenues haven’t climbed much, either. Back in 2011, GM was a $150 billion revenue company with roughly $8=$9 billion in profits. Last year, GM reported just under $150 billion of sales and profits just north of $8 billion.

In other words, GM’s financial results haven’t improved much over the past several years, so GM stock hasn’t risen much.

The company’s  financials and GM stock will continue to move sideways. In general, the fundamental headwinds of General  Motors stock will more than offset its fundamental tailwinds going forward. GM’s revenue and profit growth will be muted, and its top line and bottom line could even drop. If GM’s profit doesn’t increase, GM stock will continue to struggle.

As a result, GM and GM stock will continue to be stuck in no man’s land for the foreseeable future.

GM Stock Has Some Tailwinds

GM’s outlook isn’t all bad. Indeed, GM stock has some positive catalysts and positive attributes.

First and foremost, the valuation of General Motors  stock is attractive. The stock trades at just 5.7-times forward earnings, versus a five-year average forward multiple of 6.1 and the market’s average multiple of 17. The dividend yield  is just below  4%,in-line with the five-year average  and way above the market’s average yield of 1.9%. Thus, GM stock has a single-digit forward P/E ratio and  a big 4% yield. That’s an attractive combo.

Further, the Fed is now committed to keeping rates low, and it could even cut rates in the foreseeable future. Consequently, rates  should remain lower for longer. When rates are low, demand for big ticket items like cars is stimulated. Thus, with rates projected to stay lower for longer, auto demand should remain healthy for the foreseeable future.

Meanwhile, the economy is improving dramatically after its  late 2018 hiccup. Job creation is robust. Unemployment rates are near record lows. Wage growth is running at decade-best levels. Inflation is under control. Consumer confidence has come roaring back. Taken together, all of the broader economy’s metrics indicate that consumers should be more than willing to buy many cars over the next several months and quarters.

Last, but certainly not least, GM has GM Cruise, which is hailed as one of the most advanced autonomous driving programs in the world. Cruise doesn’t have a material financial impact on GM yet But, one day, autonomous driving will be huge. When that day comes, GM Cruise could be the one thing which wakes up the sleeping GM stock.

The Headwinds Are Stronger

Although there are positive aspects of GM stock, its negative characteristics are ultimately stronger and will keep GM stock stuck in neutral for the foreseeable future.

The valuation of GM stock is low for a reason: GM’s profits and revenues aren’t going to rise materially anytime soon. Over the past several years, GM’s delivery volumes have dropped, despite favorable economic conditions, as the company has lost market share to rising electric-vehicle players and as car ownership rates have dropped.

These two dynamics will persist for the foreseeable future. Over the past several years, they have resulted in muted revenue and profit growth. The same will happen over the next several years. Thus, GM stock is cheap because of GM’s depressed growth profile.

Second, and this relates to the first point, the EV revolution is just starting. Over the next several years, the adoption of electric vehicles will become more pervasive and widespread. As that happens, top EV brands like Tesla (NASDAQ:TSLA) will gain market share at the expense of GM. This market share erosion will naturally weigh on GM’s results.

Third, car ownership rates will drop for the foreseeable future, and the entire auto market will shrink. In general, the sharing economy and the launch of ride-hailing services like Uber and Lyft (NASDAQ:LYFT) have decreased the need to own cars, especially in urban areas. As these services grow in popularity, car ownership rates will drop over the next decade. As they do, the whole auto market will shrink. Thus, GM will have a smaller share of a smaller market. That’s not a great combination.

Fourth, the company is neck-deep in debt. Debt isn’t always a bad thing. High debt loads can, of course, be used to supercharge growth. But, against the backdrop of muted revenue growth, falling deliveries, eroding market share, decreasing margins, and a plethora of non-cyclical difficulties, GM’s $100 billion-plus debt isn’t a friendly sight.

The Bottom Line on GM Stock

GM stock has been stuck in neutral for the past five years, despite its single-digit forward price-earnings  multiple,  because its revenues and profits have gone nowhere. They aren’t going anywhere anytime soon, either. Consequently, GM stock is likely remain stuck in neutral for the foreseeable future, despite its ostensibly cheap valuation.

As of this writing, Luke Lango was long TSLA and LYFT. 

Article printed from InvestorPlace Media,

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