The investment thesis in the auto sector remains centered on fear. First, stocks dropped in 2014 and 2015 on fears over a slowdown in China. Now, the stocks are down on fears of peak auto sales due to record North American sales in 2015. The end result is extremely cheap stocks in the sector whether a global recession happens or not.
In the case of General Motors (NYSE:GM), the stock trades near multi-year lows after smashing Q4 earnings estimates. Based on 2016 EPS guidance, the stock trades at only 5x the high-end estimate of $5.75 per share. The reasons for my previous optimism on the stock still exist even with the stock down near $28 now.
The ironic part of the story is that General Motors didn't even report higher revenues for the year. Due to foreign currency impacts, the auto manufacturer saw revenues fall $3.5 billion from 2015 levels.
The company saw improving results in most regions, but General Motors still generated losses in Europe for the quarter and year, and South America for the year. The concept that the auto manufacturer is humming along at peak levels doesn't appear fully accurate.
According to the below list of retail vehicle sales around the world, 2015 saw minimal sales growth.
Source: GM Q4 '15 earnings release
The only real segment seeing strong growth are domestic truck sales. This segment definitely helps profits, but numbers aren't off the chart positive.
At the same time, the company appears more prepared for a downturn these days. General Motors suggests the more flexible workforce and the focus on profitability has the company ready for the next downturn.
The key takeaway is that the auto manufacturer might need to prove the company is better aligned for the next downturn in the cyclical industry before investors reward the stock. As a shareholder, General Motors already appears priced for a recession in the U.S. despite a low likelihood of that occurrence. At the same time, the company has the cash and cash flow to take advantage of the low stock prices.
The recommendation remains to own this stock on the reality that operations are more efficient now compared to the weak periods in the past. Even with a 40% slump in the EPS, the stock would still trade at only 10x earnings, reducing the downside risk.
Disclosure: I am/we are long GM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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