In the decade since General Motors (NYSE:GM) was bailed out, the automaker has come a long way in terms of stabilizing its business. During this period, GM stock has also provided attractive trading and investing opportunities.
![Investors Eyeing GM Stock Should Remain on Sidelines Until Headwinds Ebb](https://investorplace.com/wp-content/plugins/lazy-load/images/1x1.trans.gif)
However, as global economic activity trends lower, there are compelling reasons to remain in the sidelines than being invested in GM stock. This article will discuss some key concerns.
It is worth noting that GM stock is trading at almost the same level as it was in July 2018 before it took turn south, reaching its nadir on Oct. 15, 2018. And while the shares have clawed their way back from that low, up 18.6% versus the Dow Jones Industrial Average‘s 7.3% gain, GM’s business outlook still remains in the “zone of Uncertainty.”
China’s Growth Concerns
China has been the largest retail sales market for General Motors since 2012. With weak economic growth in 1H19 and potentially weaker growth in 2H19, the outlook is negative for GM.
To put things into perspective, China’s car sales rose last month for the first time in 12 months. Sales growth was triggered by discounts to clear inventory.
If economic growth does remain weak, it is likely that sales growth will be muted, translating into lower than expected deliveries.
General Motors has been aggressive in terms of new launches with a record 20 debuts in 2019. The company plans product launches through 2020.
However, new products can fail to generate the desired growth traction if consumer sentiment remains weak. In addition, discounts to prop sales can put pressure on key margins.
Weak sales in China have already persisted for the last few quarters. For 2Q19, the company’s deliveries in China declined by 12.2% to 753,926 vehicles.
It is also important to note that General Motors is bullish on new electric vehicles (EV) in China. Tesla (NYSE:TSLA) is already setting up its Gigafactory in Shanghai. Strong competition amidst weak consumer demand can negatively impact sales volumes and margin.
The key point being, China is unlikely to be either the revenue or EBITDA driver for General Motors.
Growth in Crossovers Amid Decline in Passenger Car Sales
Auto sales in the United States have been down for the first half of 2019. For YTD19, GM vehicle deliveries have declined by 4.2%.
For General Motors, crossover sales have grown at a robust pace. For 2Q19, crossover sales grew by 17% on a year-on-year basis even as overall deliveries declined by 1.5%. It remains to be seen if truck and crossover deliveries can completely offset lower passenger car sales in the coming quarters.
It seems increasingly likely that the Federal Reserve will cut rates this month. Chairman Jerome Powell believes that economic outlook hasn’t improved and this sets stage for expansionary policy.
However, rate cuts during the financial crisis were associated with programs such as the “Cash for Clunkers.”
With consumers already over-leveraged, it’s too early to expect a sales boost for General Motors or the industry just on the basis of a rate cut.
Still, it’s important to note that General Motors is losing market shares. As of March 2018, GM had 10.9% of the U.S. cars segment. A year later, that fell to 9.4%. Chalk that up to both competition along with weak market conditions.
To be sure, passenger car sales remain weak; its strength in crossovers is simply not enough to fuel positive stock momentum.
Bottom Line on General Motors Stock
General Motors stock faces economic headwinds coupled with competition in the traditional as well as the electric car segment. GM stock has been sideways in the last 12 months as these headwinds have not ebbed.
While a possible rate cut provides a growth catalyst, it also underscores the point that economic activity is worse than what headline numbers suggest.
GM stock is also not terribly inexpensive. The shares currently trade at a forward PE of 6.18 as compared to a five-year average of 6.5x. Considering the economic headwinds, the forward PE does not suggest a very deep valuation gap.
Therefore, it makes sense to avoid GM stock at current levels.
As of this writing, Faisal Humayun did not own any of the aforementioned stocks.