I recently bought a small position in General Motors (GM). I did so reluctantly as I am reticent on backing a firm that was bailed out by the government which also led to a circumvention of well-established bankruptcy law. I also think large and at times militant unions are one of the great destroyers of shareholder value historically (airlines, steel producers, Hostess,…etc…). However, the stock's undervaluation and the company's improving business opportunities were just too obvious to ignore. This purchase looks like this will turn out to be a lucrative investment based on the earnings results released today.
Key highlights from the earnings report of GM:
- Revenue of $36.9B came in $300mm over consensus.
- Earnings per share came in at 67 cents, 12 cents a share above estimates.
- Losses narrowed in Europe from $294mm last year in this quarter to $175mm. GM is targeting break-even results in Europe by the mid-decade.
- GM's other international operations booked a $500mm profit.
- The company sold 2.36mm vehicles during Q1, up 3.6% Y/Y. Sales in North America rose 8% to over 760K vehicles.
Five additional reasons GM has more upside from $31 a share:
- The company is becoming a cash flow machine. It has raised operating cash flow by more than 50% over the last two completed fiscal years and the stock sells for just 4x operating cash flow.
- GM is selling for 9x this fiscal year's projected earnings and just 7x 2014's expected earnings.
- The 17 analysts that cover the stock have a $35 median price target on the shares. Based on these latest results, I would expect at least a few price target raises from this group over the next few weeks.
- General Motors is actually a huge backdoor China play. Buick is one of best-selling luxury brands in the Middle Kingdom. The company is building four new plants there to increase capacity 30% to 5mm vehicles/year. The company should also benefit from the escalating tensions between China and Japan.
- The average age of vehicles on the road actually increased to 11.2 years from 10.8 years in 2012 even as auto production increased significantly. GM is in the middle of a huge product refresh and will replace a remarkable 70% of its 2012 portfolio by the end of this year. Both of these trends should bode very well for North American sales this year.