One of the most important things that I have learned in my time investing is to avoid companies in out-of-favor sectors. With that being said, it should seem odd to recommend automaker General Motors (NYSE:GM). Automakers as a whole have been smacked and overwhelmed with negative sentiment due to concerns of slowing growth and plummeting demand. A less than booming economy has undoubtedly been harming the car manufacturers, however it has put but a minor dent in GM's poised and momentous comeback.
The disfavor for automakers has left GM severely undervalued. The stock is trading at levels close to its 52 week low at $20 a share with a modest P/E of 6.08. Coming off of its most profitable year in its history, GM has been a major part of Detroit's resurgence. By revitalizing its entire fleet and making an effort to develop better-looking, more efficient cars, GM has made a major push domestically as well as internationally. GM's strong sales and growth prospects make it an exciting long-term play, and I expect the company to continue to exceed earnings expectations allowing for new life in the next few years.
In the time leading up to GM's temporary undoing their cars were simply uncompetitive. Exterior appearances, poor gas mileage, and sheer quality plagued the cars and created the less than enviable reputation attributed to American cars. As a personal anecdote, my parents for as long as I can remember have been against purchasing American cars, not because my parents are unpatriotic, but because of their quality. There is only one of the kind that they had ever purchased (at least as long as I had been alive): A Lincoln Navigator. The car was the epitome of the problem; breaking down seemingly by the week, constantly needing maintenance. Furthermore, it was bulky and had terrible gas mileage. Overcome with frustration, the pragmatic decision made was to buy a Japanese-made Toyota (NYSE:TM), and later a Lexus. Lincoln may not be a subsidiary of GM, rather one of Ford (NYSE:F), but both companies shared similar issues that led to the demise of each. I am glad to say that those days, for the most part, are over.
Through Chevy, Cadillac and Buick, GM has done an excellent job of improving its product line to better fit the needs of consumers. A perfect example of this is the Chevrolet Camaro. The car that made its brilliant entrance to the world in the first Transformers movie has been a smash hit. The car is sleek, relatively gas efficient (especially for a muscle car) with 28 highway MPG, and inexpensive. Another noteworthy car is the ever-important Chevy Volt. The American-made equivalent to the Prius has hit the road, but has not had the success to date that many would have liked to have seen. Despite this, the Volt has the potential to gain widespread popularity with its similar MPG to the Toyota Prius, and of course its better looks. The aforementioned products are just a couple of examples of notable GM creations; less pricey options such as the Cruze, Tahoe and Malibu in addition to the luxurious Cadillac XTS, Escalade and CTS all serve as evidence to the modern, efficient cars that GM has produced and have proven to be cars that people want. Most importantly, the construction of this new fleet has renovated the reputation and image of General Motors, putting them back into favor with the consumer.
General Motors has continued to transcend sales and earnings expectations domestically amidst a slowing recovery. In June alone, GM saw a 16% increase year over year in the United States despite decreasing consumer confidence. Kurt McNeil, Vice President of U.S. Sales Operations, pointed out that in addition to new models, both the low rates that have been helping to provide cheaper, more available credit and lower gas prices have stimulated consumer demand. As the cycle of the market continues, demand is falling and harming companies, but why not GM? The saving grace for the company is the low gas prices that faltering demand has brought about. Even though GM has been making an effort to create fuel efficient cars, the extra cash in the consumer's pocket at the pump may not be enough to make consumers jump for joy, but when paired with historically low interest rates the game is changed. Also, the dismal jobs report on Friday was not in fact all bad news. It stated that wages are up and more people are getting back to work (not as many as we would have liked, but it is still progress) which is helping to rehabilitate the consumer-base that was so detrimentally harmed in the collapse. GM's sales have shown that it is progressing with its comeback and continuing to strengthen its grip on the U.S. car market amongst a lackluster recovery, making its prospects under brighter circumstances even more bullish.
GM has concurrently flourished in emerging markets worldwide, particularly that of China. The world's largest market for cars is becoming more and more important to automakers. In the face of slowing growth (it is quite the unfortunate reoccurring theme, isn't it?), GM was fortunate to avoid a lack of demand. On Thursday, GM said that its sales in China for the first half of the year amounted to 1.42 million vehicles, up 11.3% year over year despite China's lowest GDP growth in almost 3 years, as reported by Yahoo News. These record sales can be a testament to GM's grip on the Chinese market. China may be slowing down, but its middle-class is continuing to grow, and more importantly, spend. Like in the U.S., when growth begins to get back on track, the already immense success that GM has had in the region should grow at even higher rates. GM and its international affiliates have been wildly popular with Chinese consumers, and still have much more growing to do.
General Motors has had positive developments in Brazil recently as well. After losing market share for almost a decade, according to Reuters, GM replaced half of its lineup this year in order to grow at a larger rate than that of its competitors. Good news is, it turns out that GM's strategy is working out better than even the company had imagined. In the Reuters report a senior Vice President mentioned that the forecast for every model was wrong. Each was able to surpass expectations. The new models have topped forecasts by 70%, effectively allowing them to outpace competition in the country. As of now GM's market share in Brazil is only 17.4%, leaving it plenty of room to grow. If the revamping of the fleet continues to work as well as it has, GM is set to boost this percentage back to its highs of around 23% in 2003 or higher in the coming years.
What can become perplexing is why the automaker stocks have been lagging if their sales have been so good. The answer is simple: many risks still linger. The most obvious and imminent risk lies in Europe. Europe is lowering margins for automakers with a presence in the region, which unfortunately, pertains to GM. However, this brings about a significant differentiating factor between GM and Ford; Ford has more ties to Europe than GM does, putting GM ahead of its competition. Europe of course is not the only risk. Slowing demand in emerging markets and the U.S., to a lesser extent, would certainly not be helpful to the auto industry. Other risks such as an increase in interest rates effectively making loans more expensive, and especially a rise in gas prices could place limitations on revenue growth for the industry as a whole. The risks are apparent, but even if China experiences a harder-than expected landing and Brazil slows for the time being, in the long run the middle-classes of these emerging nations will continue to grow and to spend, ultimately benefiting GM directly, as it is most well-positioned to succeed in these markets.
General Motors has stood up to the negative sentiment repeatedly with exceptional numbers. Even though the stock has yet to break through the bearishness, the positive numbers and execution of its effective strategy will ultimately carry the stock higher. The sector is clearly not the best to be in for the time being, but GM's far above-average performance in a below-average economic environment is a very bullish signal.
As a trade, GM could provide profits with a release of its upcoming earnings, which, if consistent with the quality of its sales and previously released data, should be astounding. As an investment, GM is a wonderful, undervalued opportunity for long-term growth which will leave shareholders as beneficiaries of its continued success. The volatility, risks and location in an undesirable sector give the bears a case, but GM's equally remarkable performance and strategy will eventually translate into a remarkably performing stock.
Disclosure: I am long GM.