The Bullish Thesis for GM Stock
The auto sector appears to be reaching a peak after years of rising sales, as demonstrated by soft May sales and declines across the board. General Motors Company (NYSE:GM) stock broke below $30.00 last Friday on deteriorating optimism toward the auto sector as inventories rise and buying stalls.
Yet GM, in my view, continues to be worth a look for investors, especially if the share price moves lower toward its 52-week low of $24.62.
Whether GM stock can recover its range high of $36.88 achieved in November over the next year is questionable. However, what intrigues me about General Motors is that the automaker has turned around its operations since being saved by the government.
Hampering GM stock was an 18% decline in GM’s U.S. auto sales to 240,450 vehicles. The majority of mass-market automakers saw similar weakness.
A positive note among the bad news was that General Motors continues to be well received in the critical Chinese auto market. In that market, the company and its joint venture partners sold an impressive 295,282 vehicles in May, up a healthy 16.9% year-over-year.
GM is now basing its auto strategy on market trends by adapting to the demands of consumers, something that was not really adhered to a decade ago.
An example is the company’s strategy to produce electric vehicles as a green alternative. GM has refined the look and effectiveness of its “Volt” hybrid electric car for 2017. The designers at GM are trying to make the car more attractive to buyers amid the market desire for esthetically better-looking vehicles, such as those made by Tesla Motors Inc (NASDAQ:TSLA). (I firmly believe Tesla is an overvalued stock.)
On the chart, the share price of GM is down 14% over the past 52 weeks and has been a laggard compared to the S&P 500.
Chart courtesy of www.StockCharts.com
While the stock market is viewing General Motors with suspicion, I’m taking the opposite route. I believe the company is worth a closer look.
My bullish thesis is based on the fact that GM stock trades at an attractive 5.06X its 2017 earnings per share (EPS) and 0.30X its trailing sales. The company’s price-to-earnings growth (PEG) ratio is also quite attractive at 0.39, meaning the stock trades below its estimated five-year compound annual growth rate for earnings.
Some may argue GM is a value trap, but I happen to disagree. The reality is that the downside risk on the chart is around $24.00, but I doubt the stock will move to these levels.
At the same time, GM investors are paid $1.46 per share in annual dividends, translating to a current dividend yield of 4.8%, which is excellent for holding the stock and waiting for a rally.
While GM’s growth metrics don’t jump out at you, the company has consistently beaten Wall Street’s EPS estimates. Add this to the fact that GM shareholders are getting paid a good dividend to hold the stock until the shares can rally, and GM stock doesn’t seem to be that bad of a deal.