General Motors Keeps Proving Doubters Wrong
The automaker's story suggests that more upside remains for the stock.
We think General Motors (GM) is misunderstood and doesn’t get enough credit for what a firm selling 10 million vehicles a year can accomplish. It has taken a long time to turn around a company of this size, but we think GM is finally just starting to realize meaningful scale. Evidence comes from the firm easily beating consensus earnings per share estimates for all four quarters of 2016, setting quarterly records throughout the year for consolidated adjusted EBIT margin and record full-year profit for GM North America. We understand that some market participants either despise U.S. automakers or do not want to invest at the top of the cycle, but we continue to think that GM’s investment thesis does not depend solely on continued growth in U.S. demand and instead comes from great product and continued manufacturing efficiencies.
A stock with a strong balance sheet, good brands, and the potential to improve margins and cash flow should not be trading for 6-7 times forward earnings as GM often does. We expect price/earnings multiple expansion into the high single or very low double digits if the company delivers on its turnaround plan. Guidance for 2017 is for adjusted diluted EPS of $6.00-$6.50, about double from 2010, the year of GM’s initial public offering. For now, investors are paid to wait with what we see as an attractive and safe dividend yielding about 4.5% on shares that offer significant upside. We think GM can boost margins via cost-efficiency measures rather than relying on high top-line growth. Our valuation model actually assumes that by 2021, GM will have lost 70 basis points of retail market share in its key North America segment relative to 2016.
David Whiston does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.