General Motors Is Still Undervalued

| About: General Motors (GM)

Summary

General Motors posted 4.5% revenue growth in the first quarter of 2016 and EPS of $1.24, which beat expectations by $0.25.

The company faces an uncertain future due to predicted slowing of global automobile sales, a more competitive market calling for higher incentives, and threats of new technology and entrants.

With an optimistic industry outlook for 2016, the stock trading at a low PE ratio, and with management's commitment to returning value to shareholders, the stock is cheap at current levels.

General Motors (GM) recently reported an outstanding fiscal quarter with revenue increasing 4.5% year-over-year and earnings per share increasing to $1.24, which beat analyst expectations and first quarter 2015 by $0.25 and $0.68, respectively. Additionally, total net revenue was $2.9 billion higher when holding exchange rates constant. In the earnings release, the company's management recalled the quarter highlights of gaining retail share in the U.S., outpacing the industry in Europe, and capitalizing on the market in China. Further, management noted that this success is allowing the company to direct significant resources to advanced technology and innovations that will make GM a long-term growth story. As a company that's generally viewed as a laggard, it was really positive for me to continue to hear management's forward looking vision and having that never satisfied attitude amid success.

In March 2016, GM reported U.S. vehicle sales of 252K, up 0.9% from the same month in 2015. This is coming off a record-breaking 2015 where the company sold a total of 3.1 million vehicles in the U.S., up 5% from 2014. While many are expecting to see auto sales start to level out, TrueCar and Edmunds.com both see the overall industry declining only approximately 0.5% from record highs reported in 2015. March wasn't the best month domestically for GM, which lost some market share to peers as it maintains a sharper focus on inventory levels. However, new versions of the Volt, Camaro and Spark contributed positively to help make up for a decrease in larger sedan sales across brands.

In addition to strong U.S. vehicle sales, GM China continued to show momentum in China largely due to the Malibu XL flagship sedan and the Cadillac brand. The foreign GM subsidiary reported sales of 963K, up slightly from the same quarter in 2015. This is coming off a 2015 where the company sold a total of 3.6 million vehicles, a 5.2% increase from 2014. GM has put a large emphasis in China by introducing 12 new and refreshed models as well as expanding its manufacturing and R&D initiatives in the growing country. While the Chinese economy has been a thorn in the side of many investors, it is exciting to see GM building a sustainable growth platform in this region.

Based on these results and the company's forecasts, management reaffirmed the expected 2016 earnings per share range of between $5.25 and $5.75. Additionally, the company expects improved EBIT-adjusted, EBIT-adjusted margin and automotive adjusted free cash flow. The keys to meeting these expectations will be a continued concentration on its product as the automotive market undergoes drastic changes, growing sales internationally, and continuing to grow the GM Financial business. While these raised expectations are certainly good news to investors, the company also is committed to returning money to shareholders, which is evident by the $5.7 billion returned to shareholders in 2015. Furthermore, evidenced by the low PE ratio, which is below 6.5 historically and forward based at the time of the article, the stock is cheap at current levels. With competitors such as Ford (NYSE:F) sitting around 7 times earnings and Toyota (NYSE:TM) sitting around 9 times earnings and GM's predictable industry, the stock is a bargain at current levels.

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Despite the company showing above 5% growth in the U.S. and China in 2015 with consistent progress in the first quarter of 2016, and management continuing to show a commitment to the shareholder, there are certainly threats to this growth. First, analysts and executives foresee another record in 2016, but at a slower rate of growth and at the expense of transaction prices as automakers rely on discounts in a competitive environment. Fearful to the investor, the slowing growth and rising incentives will likely lead to industry-wide profit reduction. This is further evident in the recent report that the level of channel stuffing by automakers is at its highest level since August of 2008, which confirms the likelihood of the aforementioned discounting. GM currently sits at 71 days supply, which is down from 67 days supply a month ago as management tightens the supply. The days supply and average transaction price will certainly be in focus as 2016 progresses.

Second, while the company is expecting to continue its penetration of the Chinese automaker market, it is certainly no guarantee. Overall automobile sales in China rose 4.7% to 24.6 million total units in 2015, which marked the slowest pace of sales growth since 2012. Third, the company continues to face lawsuits and recalls as a result of various defects. This type of uncertainty and negative press will likely weigh on the company's stock price going forward. In addition to uncertainty around lawsuits, the entire industry is currently facing an unknown future with companies like Tesla (NASDAQ: TSLA), Google (NASDAQ: GOOG) (NASDAQ: GOOGL), Apple (NASDAQ: AAPL) and car sharing platforms threatening to disrupt the current market landscape. GM has certainly attempted to stay on the forefront of the expected innovation through its partnership with Lyft (Private:LYFT). While I'm not here to predict the future of automobiles, any type of technology innovation and threats of new entrances is not good news for a current market leader. It is important for GM to stay ahead of the curve.

Despite the threats going forward of new entrants, new technology and a slowing Chinese and U.S. automobile market, I do believe U.S. automakers, GM and Ford, are positioned for growth going forward. The U.S. and Chinese sales reports have certainly been encouraging as well as the increased guidance offered by management. Additionally, with the dividend increase and additions to the share repurchase program, management has proven they are committed to returning value to the shareholder. While there are certainly going to be bumps along the road, I believe GM is a safe investment given its high dividend yield and the current state of the U.S. and Chinese automobile market. And at a PE ratio below 6.5, it is a bargain.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in F, GM over the next 72 hours.

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.