Major Upside in GM Stock?
General Motors Company (NYSE:GM) stock might not sound like an exciting name, but recently, investors in this automaker have been handsomely rewarded. In the last three months, GM stock surged over 18%. And that’s on top of its impressive dividends.
Going forward, I believe GM stock could provide investors with further upside. Here’s why.
General Motors Is a Solid Company
As an automaker, General Motors is great at what it does. The company is the number-one automaker in the U.S. market by vehicle sales. In December 2016, the company sold a total of 318,859 units of cars and light trucks. This gave General Motors a market share of 18.9%. The second-place finisher, Toyota Motor Sales USA Inc., had a much smaller 14.4% market share in December. (Source: “Auto Sales,” The Wall Street Journal, January 4, 2017.)
The company’s financials have also been improving. In the first nine months of 2016, General Motors generated $122.73 billion of revenue, up 8.63% year-over-year. The bottom line was much more impressive. For the first three quarters, GM’s net income grew a whopping 122% year-over-year to $3.31 billion. (Source: “Third-Quarter 2016 Earnings,” General Motors Company, October 25, 2016.)
GM stock Is Returning Value to Investors
With solid operations, the company is returning value to shareholders. One of the most attractive features of GM stock is its dividends. Paying $0.38 per share on a quarterly basis, GM stock has an annual dividend yield of 4.07%. Since the company reinstated its dividends in 2014, its quarterly dividend rate has increased by 26.7%. (Source: “Historical Dividends,” General Motors Company, last accessed January 16, 2017.)
This means GM stock has a yield that is almost double the average dividend yield of all S&P 500 companies, which is around two percent at the moment.
Other than paying a dividend, General Motors also returns value to investors through share buybacks. In the third quarter of 2016, the company repurchased 38 million of its own shares for a total of $1.2 billion. (Source: “Stock Repurchase Program,” General Motors Company, last accessed January 16, 2017.)
Just last week, the company announced that its board of directors has increased the authorization of its existing share repurchase program by $5.0 billion. This brings the total authorization under the program to $14.0 billion. (Source: “GM Expects Earnings Growth Again in 2017; Increases Stock Repurchase Program,” General Motors Company, January 10, 2017.)
Valuations
At the end of the day, valuations matter. And in this bloated stock market, GM stock is one of the few names that has an attractive valuation.
Trading at $37.34 apiece on Monday morning, General Motors stock has a price-to-earnings multiple of just 4.27, much lower than the industry’s average multiple of 21.28. (Source: “General Motors Co (GM.N),” Reuters, last accessed January 16, 2017.)
Other valuation metrics look attractive as well. GM stock’s price-to-sales ratio stands at 0.35, while its price-to-book ratio is 1.25. The industry in which General Motors operates has a price-to-sales ratio of 1.64 and a price-to-book ratio of 2.72.
It’s no surprise that automakers are not the hottest companies in the market today. But even within the industry, General Motors looks severely undervalued.
The Bottom Line on GM Stock
Looking at its valuations, it’s easy to see that GM stock is not really a market favorite. Investors still remember the company filing for chapter 11 bankruptcy seven years ago. But today’s GM is very different. Since its relisting on the stock market in 2010, the company has remained profitable every single year.
Another reason why investors shy away from GM stock is the projected earnings decline, which means its forward price-to-earnings (P/E) ratio is actually higher than its trailing P/E. But the big question is, will that actually be the case?
Around this time of last year, many believed that 2015 was the peak of the auto industry. But 2016 turned out to be even better, with U.S. auto sales reaching a new record of 17.55 million vehicles. While the market is still not very optimistic about GM’s financials going forward, the company’s own guidance looks quite promising. For 2017, General Motors expects its 2017 adjusted earnings per share to grow to $6.00 to $6.50, up from its 2016 calendar-year outlook of $5.50 to $6.00. (Source: General Motors Company, January 10, 2017, op cit.)
Bottom line, General Motors is running a successful business. If the company can actually grow its earnings—opposite to what the market believes–investors might warm up to GM stock again. And if GM stock doesn’t shoot through the roof any time soon, investors can still count on its generous dividends.