General Motors: A Strong Play For Value Investors

| About: General Motors (GM)

For decades, investors have hated General Motors (GM). The company's massive size and cost structure have been such a turn off for investors, many find it difficult to even consider looking at General Motors as an investment. However, the negative bias can only last so long as till a company starts to look better. What many investors forget is that General Motors is the world's largest automaker. The company sells a lot of cars. The problem from the investment standpoint has always been about the company's management and cost structure.

To correct these problems, there was no better solution than the Great Recession and the bankruptcy that followed it. The Great Recession provided General Motors with the wake up call it needed to realize it was time to get its cost structure in order. The bankruptcy provided the company with a realistic opportunity to make a break from the old ways. In the midst of all this turmoil, the company's $4.58 earnings per share last year was nothing short of outstanding.

General Motor's stock only trades for about $26, so these earnings put the price to earnings ratio at just over 5. Not bad, considering the company is emerging from bankruptcy free of the costs that have plagued it for years, and is entering an excellent auto market.

With regards to the auto market, things really can't get any better. Interest rates are low. The economic recovery is becoming firmly established. Pent-up demand for automobiles must be at an all-time high. The early statistics show vehicle trade-ins for January and February of this year are the oldest on record. This means car buyers who have long been putting off a car purchase are finally deciding it's time to buy. This speaks volumes about consumer confidence and the strength of consumer demand.

As far General Motors, sales have been great so far this year, particularly for the Chevy Volt. Sales for the Volt, a plug-in hybrid, have doubled from January to February of this year, and are expected to double again in March. The car has a rated fuel economy of 93 mpg and has won numerous awards. Fuel economy is also helping the sales for the smaller Chevy Sonic, which gets 33 mpg.

For the total car line, analysts are predicting March sales for General Motors will be around 20% higher than last March. This is outstanding, considering the strong earnings the company had last year. Even a repeat of last years earnings would have to spell a huge increase in share price, because the company's current valuation is forecasting a decline in earnings.

As far as competitors, nothing is cheaper than General Motors. Japanese automakers, Toyota (TM) and Honda (HMC) trade for 13.4 and 11.1 times forward earnings, respectively. This double the 5.8 times forward earnings General Motors currently trades for. Ford (F) even trades at a premium over General Motors at 7.4 times forward earnings.

The profit margins give some indication why General Motors is so cheap. The operating margin for Ford was 5.6% over the last twelve months versus 3.8% for General Motors. Operating margin is the best comparison for these two companies because both have deferred tax assets that inflate the net profit margin, particularly in the case of Ford. The Japanese automakers don't offer a good comparison because the Great East Japan Earthquake substantially impacted Toyota and Honda earnings.

However, over the last five years, despite the earthquake and Great Recession, both Toyota and Honda have maintained strong operating margins of 4.3% and 5.8% respectively. These margins have a strong correlation to the automakers valuation because it denotes competitive advantage. In the case of General Motors, the company's advantage is scale. While Toyota and Honda struggle to reach capacity, General Motors has substantial room to expand production. This plays in favor of General Motors in the hot auto market we should see this year.

The other argument for General Motors, beyond the great conditions for automakers in the United States, is the great conditions globally, particularly in the developing world. While Europe is projected to remain weak, growth in China and India will continue to be strong. India is particularly attractive because of expanding personal incomes and extremely low current automobile ownership.

The hot car-maker in India is obviously Tata Motors (TTM), but General Motors India has been growing as well posting a 12.8% increase in March sales from this year to last. General Motors India is only 50% owned by General Motors, however it still provides a nice growth opportunity.

These factors and General Motor's current valuation add up to a great investment opportunity for value investors. The company is having strong sales so far this year, which is great news, but not required for an investment in this company to pay off. At the 5.8 times forward earnings this company is currently trading for, as long as General Motors doesn't fall of a cliff, the company's share price should increase. The reason being a valuation like this is traditionally reserved for companies that lose money.

General Motors is the giant of the auto industry and has already returned to profitability since bankruptcy. This year's earnings could be outstanding based on the early sales projections, but regardless this company's share price is going up. What we are seeing now with this terrible valuation is the manifestation of years of poor management and bloated costs. Investors will soon realize that the hatred they had for the stock in the past, is indeed, in the past.

Keep an eye on General Motors. It is hard to believe this stock could stay this beat up for much longer.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.