Is General Motors a Risky Investment?

With shares of General Motors (NYSE:GM) trading at around $27.82, is GM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

As the Great Recession moved into the picture, car buyers moved out of the picture. This was despite the fact that there were many old cars on the road. The average consumer drives their car for 11.2 years. During late 2008 and early to mid-2009, many cars on the road had been driven for more than 11.2 years. However, economic conditions didn’t allow for many new car purchases. As the economy improved, or more importantly, as interest rates declined, pent-up demand began to lead to new car purchases. Currently, General Motors is enjoying decent margins and revenue increases, but is this sustainable?

The restructuring process for General Motors was considerably longer than the restructuring process for Ford Motor Co. (NYSE:F). This led to General Motors being behind on new model launches. However, that trend has changed. General Motors is now the leader in this area, which will mean more showroom visits. This, in turn, has the potential to lead to increased sales. North American sales are expected to see continued growth. This growth should more than compensate for a dismal situation in Europe. Restructuring in Europe should help minimize losses in Europe, but it won’t prevent losses.

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The chart below compares fundamentals for General Motors, Ford, and Toyota Motor Corporation (NYSE:TM). These three companies differ in size. Toyota is a much larger company, but this article will focus more on U.S. automakers. General Motors has a market cap of $38.01 billion, Ford has a market cap of $51.58 billion, and Toyota has a market cap of $162.52 billion.

GM

F

TM

Trailing   P/E

9.53

9.24

16.63

Forward   P/E

6.38

7.74

13.35

Profit   Margin

4.06%

4.22%

3.51%

ROE

16.15%

36.10%

7.94%

Operating   Cash Flow

$10.60 Billion

$9.04 Billion

$30.85 Billion

Dividend   Yield

N/A

3.00%

1.30%

Short   Position

7.30%

N/A

N/A

 

It should be noted that only Ford has positive levered free cash flow, which is $12.25 million. Levered free cash flow for General Motors is -$11.16 billion. Levered free cash flow for Toyota is -$8.00 billion. Let’s take a look at some more important numbers prior to forming an opinion on General Motors.

E = Equity to Debt Ratio Is Strong   

The debt-to-equity ratio for General Motors is stronger than the industry average of 0.80. It’s also stronger than the debt-to-equity ratios for Ford and Toyota.

Debt-To-Equity

Cash

Long-Term Debt

GM

0.43

$26.12 Billion

$16.05 Billion

F

6.44

$24.42 Billion

$105.06 Billion

TM

1.10

$35.57 Billion

$165.78 Billion

 

T = Technicals on the Stock Chart Are Mixed

General Motors and Ford have both underperformed the market year-to-date. A company might report record earnings, offer strong guidance, and display top-notch innovation, but if the stock doesn’t move in the right direction, it means nothing to investors.

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1 Month

Year-To-Date

1 Year

3 Year

GM

2.47%

-3.50%

8.46%

N/A

F

4.28%

2.29%

7.75%

7.35%

TM

0.04%

10.07%

19.23%

31.54%

 

At $27.82, General Motors is trading below its 50-day SMA, but above its 100-day SMA and 200-day SMA.

50-Day   SMA

28.16

100-Day   SMA

27.28

200-Day   SMA

24.57

 

E = Earnings Have Been Steady               

Revenue has steadily improved on an annual basis. Earnings haven’t showed as much consistency, but they have remained on the correct side of the line.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

148.98

104.59

135.59

150.28

152.26

Diluted   EPS ($)

-53.47

56.62

2.89

4.58

2.92

 

When we look at the last quarter on a year-over-year basis, we see increases in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

37.99

37.76

37.61

37.58

39.31

Diluted   EPS ($)

0.24

0.60

0.90

0.89

0.53

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

Demand has increased, costs have decreased, and this has become a positive pricing environment. The biggest question mark right now is Europe, which has dragged on earnings. Another bigger risk down the road is what happens to the industry if cheap financing disappears.

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Conclusion

As long as interest rates remain low, there will be good potential for both General Motors and Ford. At the moment, General Motors is enjoying many tailwinds.

General Motors remains an OUTPERFORM.

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