Investors in General Motors (NYSE:GM) have had a disappointing year with shares down 18.6% year to date. The recall scandal that rocked the company over the winter has clearly weighed on shares as the market feared what the safety concerns would do to the brand and sales rate. Well on Tuesday, we received another batch of monthly sales, and it is clear that GM's business remains strong. I continue to advocate that investors buy shares.
In the month of November, GM sales jumped 6.5% to approximately 226k cars (details available here). Importantly, GM's average selling price increased by 2.3% from last month (and 9.5% from a year ago), which suggests GM did not rely on discounts to move inventory. Its inventory also declined to 88 days of sales from 94, though I still would like to see this figure move closer to 60 days to be sure GM is not forced to discount stale inventory as new products come to market. This month marked GM's best November since the financial crisis. Clearly, GM's brand has not materially suffered in the eyes of consumers.
For the past few months, the US auto market has been running at a very robust 16.5-17.5 million run rate, which is the best in years. I expect the auto market to remain strong in 2015 as many consumers had deferred purchasing cars during the recession. Our fleet remains a bit older, and 2015 should get a continued boost from this pent-up demand. Equally important, auto loan rates continue to be very low thanks to a 10 year treasury that continues to yield less than 2.5%. Comparatively loose and affordable credit will further underpin the strength in the market. I expect 2015 auto sales to exceed 16 million units, which is a positive for GM.
Additionally, we have seen a dramatic decline in oil prices of late, and if this persists, we could see some consumers, on the margin, opt for larger cars and SUVs. In fact during November, Cadillac Escalade sales soared 75%, and tight inventory probably constrained this sales growth. The Chevy Silverado also saw 24% growth, and demand for pick-up trucks should benefit from a slowly improving construction market. Trucks tend to be higher margin than small cars, so strength in these vehicles should really benefit the bottom line.
This November sales data makes me confident that consumers have largely shrugged off the recalls and are interested in GM's new products. With an economy that continues to grow and some pent up demand, 2015 should be a strong year for GM in North America. Now, strong operations do not necessarily translate to strong stock performance as valuation may not be reasonable. In the case of GM, I consider the valuation to be reasonable.
Assuming a strong US market, a weak but gradually improving European market, and a continued slowdown in China, GM should be able to earn $4.30-$4.40 a share next year. That leaves the stock with an extremely cheap 7.65x multiple. On top of that, GM has a pristine balance sheet. One of the benefits of going bankrupt is that the entity that emerges has very little debt, and GM is reaping this benefit. As of last quarter (available here), GM carried $26 billion in cash and cash equivalents against less than $8 billion in debt. Its net cash position of $18 billion is about 34% of its market capitalization or $11 per share.
Ex-cash, GM is trading at $22 or roughly 5x earnings. GM is trading at a rock bottom multiple, and it can use that cash hoard to buy back shares or grow its dividend (GM already yields a sizable 3.6%). With this low valuation and pristine balance sheet, GM offers a large margin of safety. After another set of strong monthly sales, this discount to the market is not justified. Investors should take advantage of GM's low stock price and continue to buy shares.
Disclosure: The author is long GM.
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