Earlier in the year I penned a piece about picking up some stock in 'Government Motors' also known as General Motors (GM). The shares have provided a nice return since then but I believe better things still are in the future for this American manufacturing icon.
In recent news the government announced that it sold another huge block of General Motors stock it has held since the company's bankruptcy in 2009. It also stated that all shares should be out of government hands in the near future.
This provides two positive catalysts for the stock:
- It reduces the overhang of having GM's largest stakeholder consistently selling large amounts of shares.
- It also should remove the stigma of being 'Government Motors' which has dampened sales in an important demographic (AKA, the segment that has labeled GM as a bailout baby also buys a lot of pick-up trucks if you believe the labels the mainstream media gives it).
In addition, once the government is no longer a shareholder, General Motors should attract fund activists. These activists will be pushing for more shareholder friendly uses for the company's over $25B cash hoard. The company should also have more than $5B in free cash flow in 2014 which will continue to increase these net cash holdings. Activists will hope to get the company to raise its stock repurchases and/or initiate dividend payments.
Regardless of activists, General Motors has several positives going for it as we get closer to 2014.
Both Ford (F) and General Motors have recently reported better than expected results from their long struggling European operations. October European auto sales were up for the second month in a row with GM seeing a better than 6% Y/Y increase. If Europe can continue to turn around, it will be a huge boost to both American car manufacturers' fortunes.
In the States, annual car production is almost back to pre-crisis levels. The average age of a vehicle on the road domestically is ~11 years which bodes well for future demand in the years ahead. In addition, falling gas prices should be a positive for larger vehicle sales like pick-up trucks and SUVs. This is important as these vehicles carry much higher margins that car sales.
Finally, the company's sales growth in China is impressive. General Motors through its joint ventures sold almost 2.6mm vehicles in the Middle Kingdom in the first ten months, up nearly 12% Y/Y. The company should also continue to benefit from the escalating tensions between China and Japan which has hurt sales of Japanese auto manufacturers in China.
For these reasons, GM stock is too cheap at current levels. After subtracting its net cash, GM sells for 6.5x forward earnings. This is a huge discount to the market multiple of ~16x and also lower than competitors like Ford (9.3). BUY