General Motors (NYSE:GM) shares have been trending higher and that is likely to continue because this stock is still very undervalued. There are risk factors such as persistent weakness in Europe due to high unemployment and an ongoing financial crisis. Also, the recent rise in the Japanese Yen is another challenge because this makes Japanese cars cheaper when exported around the globe. However, those issues appear to be speed bumps on the road to a much higher stock price for GM.
General Motors is posting strong sales results and in March it saw year-over-year gains of 6.4% in the United States. That was better than gains of 5.7% for Ford (NYSE:F), and 5% for Chrysler. It also beat out Toyota (NYSE:TM) which saw a 1% increase in sales. A recent CNBC article details why Morningstar analyst David Whiston is so bullish on GM and it states:
Whiston said. "I don't think people realize what GM can do once they get up to speed." Whiston points out that "GM's key U.S. market is still growing, and they have a very robust practice in China." But while he can find plenty of reasons for GM investors to be optimistic, for this analyst, it's ultimately all about the cars. "GM's car portfolio is just night and day better than it was even a few years ago." Whiston's "fair value" estimate on the stock is $52-a healthy 85 percent higher than where shares find themselves today.
Another industry follower also believes that GM is undervalued. Steven Rattner of Willett Advisors (he was also the former auto industry advisor to the Treasury Department under President Barack Obama), recently stated why he thinks GM shares should trade higher:
"It trades at a significant discount to Ford. I don't think that's warranted," he said. "I think GM is a great company. It has some things to prove over the next few months with its next product launches. But if you want to look for a great company with a stock that I believe is undervalued, that's where I would be looking."
One potential reason why Ford trades at a higher valuation (in terms of price-to-earnings multiple) is because it did not take a bailout from the U.S. Government. This has been a boost for Ford in terms of image and it has allowed Ford to start paying a dividend. Many investors and consumers still believe that GM owes the government untold billions in loans, but that is not true.
The government accepted an ownership stake in GM as part of the bailout (and repayment for the loan) and it has been selling those shares. This has been an "overhang" on GM shares for the past couple of years. However, the U.S. Government sold about 18 million GM shares which was equivalent to about $489.9 million. This follows up on other stock sales which started in January, 2013. The good news is that the government plans to sell its stake in GM by early 2014, at the latest. This will end the overhang and also allow the negative perceptions about the bailout to fade. Once the government is no longer a major shareholder, GM should be able to reinstate a dividend and that will be another catalyst for the stock.
GM has a very strong balance sheet with about $26.12 billion in cash and around $16.05 billion in debt. Ford has about $24.42 billion in cash and around $105 billion in debt. While many believe that Ford is a stronger company, a comparison of the balance sheet data shows just that GM is extremely well-positioned.
Analysts expect GM to earn $3.40 in 2013 and $4.36 in 2014. That indicates a price-to-earnings ratio of about 8.2 times. This is well below the average for the S&P 500 Index (NYSEARCA:SPY) which is about 14 times earnings. It is also a discount to Ford which trades at about 10 times earnings. If GM earns about $4.36 per share in 2014 and if there is some expansion in the price-to-earnings multiple to about 12, then it is reasonable for GM shares to trade for around $52 (as the Morningstar analyst noted above believes it will). Earnings growth, multiple expansion, a potential re-instatement of the dividend, and the final sale of government-owned shares, are some of the possible catalysts that could cause this stock to roughly double in the next couple of years.
Here are some key points for F:
Current share price: $12.68
The 52-week range is $8.82 to $14.30
Earnings estimates for 2013: $1.39 per share
Earnings estimates for 2014: $1.67 per share
Annual dividend: 40 cents per share which yields about 3%
Here are some key points for GM:
Current share price: $27.80
The 52-week range is $18.72 to $30.68
Earnings estimates for 2013: $3.40 per share
Earnings estimates for 2014: $4.36 per share
Annual dividend: none
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I am long GM. 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.