General Motors Company (GM) and Johnson Controls, Inc. (JCI) are two auto-related companies, with low forward P/E and high expected EPS growth (next five years), receiving analysts' upgrades recently. Both stocks will be analyzed fundamentally and technically in this article. Investing strategies will also be presented.
General Motors Company
GM was up 0.18% and closed at $28.21 on March 15, 2013. GM had been trading in the range of $18.72-$30.68 in the past 52 weeks. GM has a market cap of $38.55B.
On March 15, 2013, Equities researchers at Deutsche Bank boosted their target price on shares of GM from $38.00 to $39.00 with a "buy" rating on the stock. Analysts currently have a mean target price of $34.88 and a median target price of $35.00 for GM. Analysts are estimating an EPS of $0.56 with revenue of $36.72B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $3.39 with revenue of $157.33B, which is 3.30% higher than 2012.
According to RDI report, signs of an improving U.S. housing market combined with upbeat readings on U.S. consumer confidence have continued to fuel the auto industry's rally in 2013. The Fed's policy of keeping interest rates near-zero has benefited the auto industry as a majority of Americans rely on loans to purchase new vehicles. Marketing firm LMC Automotive projects new vehicle sales to grow to 15.3 million in 2013.
There are a few positive factors for GM:
- Higher revenue growth (3-year average) of 13.3 (vs. the industry average of 7.7)
- Higher ROE of 23.1 (vs. the average of 14.9)
- Lower debt/equity of 0.4 (vs. the industry average of 0.8)
- Lower P/E of 9.7 (vs. the industry average of 25.3)
- Lower Forward P/E of 4.8 (vs. the S&P 500's average of 13.9)
- After the bail-out, GM has a much healthier balance sheet with a total cash of $26.12B and a total debt of $16.05B
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend. The momentum indicator, RSI (14), is showing a slightly bullish lean at 54.91. GM is currently trading above its 200-day MA of $ 24.31 and is approaching its 50-day MA of $28.43, as seen from the chart below.
How to Invest
With the estimated 15.02% EPS growth for the next five years, GM is improving fundamentally. In the near-term, it is important to see if GM can break through its 50-day MA to determine its short-term direction. For long-term investors, a safer entry point will be around $26-$26.5 range. Investors can also review the following ETFs to gain exposure to GM:
- IPOX-100 Index Fund (FPX), 8.18% weighting
- Mega Cap AlphaDEX Fund (FMK), 3.36% weighting
- Strategic Value Index Fund (FDV), 2.19% weighting
Johnson Controls, Inc.
JCI was up 0.11% and closed at $34.97 on March 15, 2013. JCI had been trading in the range of $23.37-$35.10 in the past 52 weeks. JCI has a market cap of $23.93B with a beta of 1.81.
After multiple downgrades since early 2012, JCI had finally received a positive upgrade from the analyst. On March 14, 2013, Credit Agricole upgraded JCI from outperform to buy with a price target of $50.00 (from $36.00). Credit Agricole's new target price is much higher than the current analysts' mean target price of $33.12 and median target price of $33.00. JCI's share price hit new 52-week high of $35.10 on Thursday. Analysts, on average, are estimating an EPS of $0.42 with revenue of $10.45B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $2.59 with revenue of $43.07B, which is 2.70% higher than 2012.
While there are some recent reports indicating that JCI is exploring the sale of its automotive electronics business, analysts at Morgan Stanley don't think it's a good idea to split the company as it will be destructive to shareholder value. JCI will not and should not break up the company as sum of the parts is worth less than the whole, where each stub could trade at a lower multiple than current and peer levels after the split, according to the analyst.
There are a few positive factors for JCI:
- Higher revenue growth (3-year average) of 13.8 (vs. the industry average of 4.5)
- Lower debt/equity of 0.5 (vs. the average of 0.6)
- Lower P/B and P/S of 2.0 and 0.6 (vs. the industry averages of 2.6 and 0.7)
- Lower Forward P/E of 11.3 (vs. the S&P 500's average of 13.9)
- JCI has 5 year average dividend yield of 2.10% and offers a forward annual dividend yield of 2.20%
Technically, the MACD (12, 26, 9) indicator is showing a bullish trend. RSI (14) is indicating a strong buying momentum at 80.15, where above 70 is considered as over-bought. JCI is currently trading above its 50-day MA of $31.64 and 200-day MA of $28.06, as seen from the chart below.
How to Invest
As a leading auto-parts supplier, JCI continues to diversify itself. With expected 11.36% EPS growth for the next 5 year, JCI still has further side potential at current valuation. In the short-term, JCI is technically bullish. However, RSI (14) indicates an over-bought condition. It does not mean JCI will pull back soon, but investors may want to wait for a pull back to establish the long-term position. A safer entry point will be in the range of $30-$31.
Note: All prices are quoted from the closing of March 15, 2013. Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.