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By Barry Schwartz

Tesla (TSLA) has grabbed all the headlines recently with its amazing stock run. While General Motors (GM) won't be testing $100 a share anytime soon, we believe that GM's stock has the ability to double in price well before Tesla's stock does again.

The recovery in North American auto sales since 2009 has been truly outstanding. We all know the improving economy coupled with ultra-low interest rates has fueled car sales back to pre-recession levels. As a result, the stocks of all auto-related manufactures, like Ford (F) and Magna (MGA), have gone straight up. While it is tempting to say that the run is over for these companies, we believe that we are still in the beginning stages of a strong auto sales cycle. Prior to the recession of 2008/09, car sales in the U.S. averaged about 16.6M per year during the 10-year period between 1997 and 2007. Continued economic expansion, low interest rates, and a better replacement cycle could mean that car sales going forward will follow along the same path. Sure, cars are lasting longer these days, but the U.S. car fleet is very old. In fact, at 11.4 years the average age of all cars and trucks in the U.S. is at record levels.

We believe that the best way to play this sales cycle is through GM. A lot has to go right, but there is potential for GM to earn $7 a share by 2016. Here are a number of catalysts that could take its stock much higher:

  • First, GM trades at an undemanding valuation of 8 times forward earnings vs. the S&P 500 index at 15 times. Its valuation is also at a discount to its peers. Ford, Toyota (TM), and Honda (HMC) are all valued at least 15% higher on forward earnings.
  • Second, GM is set to generate significant free cash flow which it could use to initiate a dividend or stock buyback. Its balance sheet is no longer burdened by the liabilities it had prior to bankruptcy. In fact, GM is on track to have no debt in a few years.
  • Third, there is a potential for past headwinds to become future tailwinds. GM has been losing money in Europe for many years. Its last quarter was its closest to breakeven and with Europe on the mend, profitability could be just around the corner. GM has high leverage to BRIC nations, especially China, and could benefit from faster GDP growth offered by those countries.
  • Finally, at some point, the U.S. Treasury, Canadian government, and United Automobile Workers union -- which collectively own about 20% of GM shares -- will decide to cash out. While the market will have to digest a lot of new shares, the good news is that GM will finally become a free market participant again.

No question GM is a show-me story, but at eight times forward earnings, a double-digit forward free cash flow yield, and an over 20% return on equity measure, you are not paying a high price given its potential.

Disclosure: Clients of Baskin Financial own shares in GM.

Source: The Road To Recovery For General Motors Has Just Begun