GM: A Real Risk To The Trump Rally

| About: General Motors (GM)


Last year I covered General Motors and in plain language I told you that this company was a buy.

With the stock in the mid $30's the real risk to the name now would be a tanking economy.

I discuss performance in the context of the 20% plus rise since my buy call.

Last year I covered General Motors Co. (NYSE:GM) and in plain language I told you that this company was a buy based on shareholder friendly policies and expectations for future performance. I have continued to like the name when it dips under $30 and loved it under $27. Of course now it is in the mid-$30s and we might not see those levels again. Of course when I said under $30 was a bargain, I was following-up to my article where I cited that it was a name that was hard not to like. I talked about the high yield, the buyback and the improving aspects of the business. Bottom line, the company has turned around and has now been delivering strong earnings while growing revenues. The decline in oil prices has assisted auto sales, particularly of larger vehicles. The stock has been rallying hard since Donald Trump's election. But does performance support the 15% rally the name has seen?

Well the company just recently reported results for Q3 2016. The company delivered both a top and bottom line beat. These were major beats. Revenue had been an issue for some time in terms of missing expectations, but the company had been doing rather well on the income front. So what are we looking at? Well, net income came in at $2.8 billion in Q3, or $1.76 per diluted share. This is up 104% from last year's results. Wow. Earnings per share on an adjusted basis was a strong $1.72 per share and this beat estimates by a strong $0.18. Further this is a new record for the company in Q3. Adjusted earnings before interest and taxes adjusted increased to a record $3.5 billion and the EBIT-adjusted margin grew to 8.3%. I am incredibly pleased with the results.

What about sales? Sales were slow in some areas with shaky economies but in Q3 revenues were incredibly strong. GM's net revenue came in at $42.8 billion. This beat estimates by a whopping $3.51 billion. That is incredibly strong. Sales were up 10.3% compared to last year on an absolute basis. I want to also point out that nearly all sectors performed well; however, Europe continues to be a bit weak, but has improved markedly. In contrast, North America has been incredibly strong, more than enough to offset any international weakness. As a whole, the company did very well. Commenting on the quarter, CEO Mary Barra said:

"Given our outstanding performance this year, we are on track to deliver a record 2016 on top of a record 2015 and a very strong 2014. In addition, we expect to be at the high end of our full-year EPS diluted adjusted guidance of $5.50 to $6 per share. We also completed our initial $5 billion share buyback commitment a quarter early and we'll be purchasing additional shares in the fourth quarter. We had very strong performances in North America and China."

From my viewpoint, this quarter was a huge success. Simply outstanding. Incredible margins in North America and strong margins in China continue. Europe has improved drastically over years past. Record revenues, record earnings, incredible margins. Despite the stock rising since I last covered the name, this is still a dividend play. Sure the economy could tank again and sales could dip. That is a real risk. But it is one I am willing to make at over a 4.5% yield when revenues and earnings are growing tremendously. I see the stock continuing to move higher longer-term.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles that are time sensitive. If you would like to be among the first to be updated, be sure to check the box "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.