Past Performance: General Motors (NYSE:GM) has missed two EPS expectations over the past nine earnings releases. Both of those misses came in the fourth quarter, meanwhile the past two first quarter releases beat EPS expectations by an average of 6.7%. Expectations for the first quarter of this year are 40% lower than the first quarter last year, which could forecast a possible earnings beat to come.
GM has pulled back from hitting a 52-week high back on January 15th of this year. GM is showing fairly valued trending towards oversold. General Motors has support at the $26.50 level and faces resistance at $29.90. An EPS beat in April may help General Motors test the resistance level.
Fundamentals: General Motors trades with a current P/E of 9.60, a forward P/E of 6.44, a P/S ratio of 0.25, and a PEG ratio of 0.51. The consumer goods sector trades with a P/E of 20.5 and a forward P/E of 19.2. Comparatively, the S&P 500 trades with a P/E of 20.6 and a forward P/E of 17.5. Based off of current valuations, General Motors is trading far cheaper than both the consumer goods sector and the S&P 500 average.
Future valuation measures, the forward P/E and PEG ratio, show that General Motors is undervalued looking outward as well. Even though the consumer goods sector is trading at a slight premium compared to the S&P 500 average based off of the forward P/E, the automobile industry trades with a forward P/E of 16.7.
The Story: General Motors is facing headwinds from multiple macroeconomic factors. GM will face decreased consumer demand as the $1 trillion in budget cuts over the next decade limit job creation in the public sector. With limited job creation, that means less disposable income for consumers to spend on big ticket items.
The Federal Reserve keeping interest rates low isn't helping General Motors either. As long as interest rates remain extraordinarily low, banks will be less inclined to make loans as they can create a bigger ROI by investing the money in other areas. With less incentive to make loans, banks will continue to keep the qualifications for a loan tight. Fewer loans, and fewer people who can qualify for loans will continue to stifle potential growth of car sales.
How to Play It: General Motors has pulled back from the 52-week high, and found support at $26.50. Based on the past performance of General Motors during first quarter earnings, and the undervalued fundamentals of the stock, I would expect General Motors to enjoy price appreciation after they release earnings in April. If the Federal Reserve relents with their low interest rate initiative, General Motors will enjoy an increase in sales as well. My 52-week price target: $34.22.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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