General Motors Generally Lacks A Motive

Jul.15.14 | About: General Motors (GM)

Summary

General Motors has shaky revenue and a federal investigation to deal with.

General Motors has a healthy balance sheet and increasing cash from operations.

General Motors is trading at a very high price to earnings ratio and may not be good to enter at this time.

General Motors (NYSE:GM) has recalled a record-breaking 29 million vehicles in the United States this year alone. Along with receiving a federal bailout worth billions, it seems like this old American firm may need to slow down. The stock stands at a historical midpoint, indicating a lack of investor confidence on either end. With all the negative hype around GM for the time being, could the stock be poised for an entry? We need to look at the company's fundamentals in order to find out.

Fundamentals

General Motors' revenue took a hit that it never seemed to recover from. The firm was heavily affected by the 2007 recession; the stock price appears to have outperformed the revenue of the firm. It could be possible that many people saw the overall rise in the equity markets and used GM stock as a reasonable entry point into the bull market. This may not necessarily coincide with better performance by the company itself, however.

Click to enlargeSource: YCharts

Although the firm has experienced shaky revenues as of late, management has managed to keep the net income steady, indicating that well-timed cost cutting could be a boon towards getting cash when it's needed.

Click to enlargeSource: YCharts

The company has decent cash flow, as evidenced by the graph below. It appears that operations and financing are both becoming a ready source of cash; what's good to see is that the firm has and is willing to use cash from its operations. This should imply that the company isn't taking on too much debt.

Source: YCharts

Click to enlargeWe can see that this is in fact the case with General Motors. The firm has experienced steadily declining liabilities and increasing assets, with the current ratio (assets/liabilities) reflecting this change.

Click to enlarge

Source: YCharts

The fundamentals look healthy enough. As to whether the stock is at a good entry point, we can look at the price to earnings ratio:

Click to enlargeSource: YCharts

The historically high price to earnings ratio may indicate that the stock is actually overbought; this would be in line with the price of GM stock exceeding the firm's actual revenue growth.

Conclusion

GM stock appears to be overbought for the time being. It's very likely that a class of investors saw GM stock as an excellent way to get into the post-recession bull market. The stock has appreciated along with the regrowth of America's economy, but the firm itself isn't doing so well, as noted by some of the firm's fundamentals and the massive recalls that GM has had to initiate. Keep in mind that the recalls are happening because of a federal investigation as regards claims made by GM about an ignition switch flaw - this could lead investors to flee before the stock appreciates any further. Judging by the high price to earnings ratio and other factors, I would say now is not a good time to enter General Motors stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.