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Summary

  • The financial efficiency ratios have decreased, but the tide is going to turn shortly.
  • The stock remains inexpensive on future earnings estimates and earnings growth potential, even though 2015 earnings estimates continue to get cut.
  • On a technical basis the stock is showing a little more risk than reward right now.

The last time I analyzed General Motors Company (NYSE:GM) on July 18, 2014, I stated, "I like the stock but I think it could pull back in the near future." Since the article was published, the stock has decreased 6.2% versus the 2.31% gain the S&P 500 (NYSEARCA:SPY) posted. Fortunately, I stuck to the plan and didn't buy anything, saving myself some heartache. GM designs, builds and sells cars, trucks and automobile parts globally.

On July 24, 2014, the company reported second quarter earnings of $0.58 per share, which beat the consensus of analysts' estimates by $0.01. In the past year, the company's stock is up 2.1% excluding dividends (up 3.81% including dividends) and is losing to the S&P 500, which has gained 22.67% in the same time frame. Since initiating my position back on February 25, 2014, I'm down 2.03% inclusive of reinvested dividends and dollar cost averaging. With all this in mind, I'd like to take a moment to evaluate the stock to see if right now is a good time to purchase more for the consumer goods sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 28.06, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 7.7 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $4.52 per share and I'd consider the stock inexpensive until about $68. The 1-year PEG ratio (0.42), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is inexpensively priced based on a 1-year EPS growth rate of 66.31%. The company has great near-term future earnings growth potential with a projected EPS growth rate of 66.31%. In addition, the company has great long-term future earnings growth potential with a projected EPS growth rate of 16.1%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

15Apr14

32.55

13.68

6.70

4.86

72

0.38

35.88

14May14

34.94

18.78

7.34

4.76

71

0.38

49.76

16Jun14

35.85

19.16

7.51

4.75

71

0.37

52.33

17Jul14

37.10

19.95

7.88

4.71

71

0.37

53.94

31Aug14

34.80

28.06

7.70

4.52

68

0.42

66.31

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 3.45% with a payout ratio of 97% of trailing 12-month earnings while sporting return on assets, equity and investment values of 2.8%, 13.1% and 3.7%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 3.45% yield of this company is good enough for me to take shelter in for the time being. The company barely started paying its dividend earlier this year. Below is a comparison table of the financial metrics for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

15Apr14

3.69

50

4.7

24.6

3.7

14May14

3.43

65

4.0

19.9

3.7

16Jun14

3.37

65

4.0

19.9

3.7

17Jul14

3.23

65

4.0

19.9

3.7

31Aug14

3.45

97

2.8

13.1

3.7

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock bouncing off of oversold territory since August 7th and currently in middle-ground territory with a current value of 51.70. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line with the divergence bars decreasing in height indicating the bullish momentum is getting tired. As for the stock price itself ($34.80), I'm looking at $35.25 to act as resistance and the 20-day simple moving average (currently $34.11) to act as support for a risk/reward ratio which plays out to be -1.98% to 1.29%.

Global Auto Sales Up

The company recently announced that the Cadillac SRX is now going to be built in the good ole US of A, starting in mid-2016. The vehicle was previously built down in Mexico but is going to be transferred to Tennessee. However, the company intends to play shell game by transferring some work for the Chevy Equinox from Tennessee down to Mexico. The southward move for the Equinox isn't planned to take place until 2017, when the vehicle is subject to a redesign. Presumably there should be a net increase in employment at the Tennessee plant while the vehicles overlap, but I'd be willing to bet it will be a temporary increase. The company also plans to invest another $185 million to build a new engine in Tennessee, but it will retain 390 jobs as opposed to creating them. The Tennessee plant will definitely be about efficiency, as it currently employs 2,000 hourly workers, but when the complex is re-tooled it will employ about 1,800 people. I definitely like to hear that management is driving towards efficiency, but there's a soft spot in my heart for anyone that may lose a job.

Conclusion

We have a good yield in the name, and I don't mind getting paid to wait while the company is turning around. Fundamentally, I believe the stock to be inexpensively valued on next year's earnings estimates and on earnings growth potential, but 2015 earnings estimates have decreased 4% in the past month. Financially, the dividend is pretty good but I don't believe it can grow anymore right now and then we have the story of decreasing financial efficiency ratios. On a technical basis the risk/reward ratio shows me a bit more risk than reward with tiring bullish technicals. I won't be buying any shares in the name right now but may take a bite on it in the next couple of weeks.

Because I swapped out Kraft (NASDAQ:KRFT) for GM in my dividend portfolio, it is only fair that I provide an update from the swap-out date. From February 25, 2014, GM is down 4.79% while Kraft is up 8.73%, and the S&P 500 is up 8.42%. As of now it looks like I'm losing on this trade but I'm in it for the long haul.

(click to enlarge)

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Source: Get Paid To Wait For High-Yielding General Motors