Here’s a harsh reality for General Motors (NYSE:GM) shareholders. Five years ago, General Motors was a $35 stock. Today, it’s a $36 stock.
In other words, GM stock has gone nowhere over the past five years — a stretch during which the S&P 500 index has risen 50%. That is woeful under-performance.
The more-sobering news is that this under-performance will likely persist for the foreseeable future. In the big picture, the GM stock price is stuck in neutral. The auto market isn’t growing or shrinking. Competitive pressures are rising, but GM is responding adequately to those pressures. GM’s revenues are aren’t growing or shrinking. Margins are under pressure, but that pressure is offset by buybacks. Profits won’t go anywhere over the next few years.
As go profits, so go stocks. So, if GM’s profits indeed don’t go anywhere over the next few years, neither will GM stock.
The investment implication? This is a boring stock. If you like boring, buy the stock, for the 4% yield and stability. But, if you’re trying to generate alpha, I’d stay away from GM stock. This stock won’t generate any alpha, any time soon.
General Motors Stock is Relatively Safe
Unless the U.S. plunges into a recession in the foreseeable future — which I see as very unlikely — then GM stock should remain a relatively safe investment with limited downside potential and a healthy, stable yield.
The core logic is simple. Sure, the U.S. auto market isn’t growing. It hasn’t grown in more than four years. But, it’s not shrinking, either, and low rates across the U.S. Treasury yield curve, coupled with a dovish Fed and strong labor market, imply that favorable buying conditions will continue to support stable auto demand for the foreseeable future.
In that stable market, GM should maintain healthy share. The company has struggled tremendously over the past few years with electric vehicle competition. But, GM is finally punching back by electrifying its own portfolio of vehicles. Thus, over the next five years, GM’s vehicle electrification efforts should help the company stabilize shrinking market share, which should in turn help stabilize sales.
Margins are under pressure, too. But, again, that pressure should ease as vehicle portfolio electrification re-stimulates demand, which allows GM to regain some pricing power and stabilize margins.
Net net, barring a recession which kills the entire U.S. auto market, General Motors should remain a largely stable company for the foreseeable future, with stable sales and profits. At the same time, GM stock has a 4%-plus yield. So, for investors seeking stability and yield, GM stock could be a good place to park your money.
No Alpha No Time Soon
On the flip-side, GM stock won’t generate any alpha in the foreseeable future.
See the comments above. The U.S. auto market isn’t growing, nor will it grow by much any time soon. GM’s share in that market isn’t expanding, nor will it expand by much any time soon. Margins aren’t expanding, nor will they expand by much any time soon.
Put all that together, and you have a company that projects to be a flattish revenue growth operation with flattish margins and flattish profits. Indeed, according to consensus sell-side estimates on YCharts, Wall Street thinks GM’s revenues will be stuck around $145 billion-$146 billion for the next few years, while EPS will be stuck in the $6.50 to $6.70 range.
So long as revenues and profits remain stuck in those ranges, GM stock won’t shoot higher. Sure, one could argue that GM stock is dirt cheap at just 5.5-times forward earnings. But, stocks that aren’t growing profits are always dirt cheap, and they remain dirt cheap until profits start growing again.
Profits won’t start growing again at GM any time soon. As such, for the foreseeable future, GM stock will likely remain stuck in neutral.
Bottom Line on GM Stock
GM stock hasn’t gone anywhere in five years. It won’t go anywhere over the next few years, either. The reality is that revenues and profits here are stuck in neutral. So long as they remain stuck in neutral, GM stock will remain stuck in neutral, too.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.