Why General Motors Company Is Starting to Look Expensive

General Motors'  (NYSE: GM  ) recovery has been one of America's major recent success stories, as the automaker bounced back from near-bankruptcy to very impressive revenue growth. This successful turnaround has been reflected in the company's share price, which has risen around 52% over the last 12 months. However, the stock is now starting to look a bit pricey, especially compared to major competitors Ford (NYSE: F  ) and Toyota (NYSE: TM  ) .

November US sales figures
November car sales once again proved that GM is back in business. Overall, US car sales rose 8.9%, with monthly sales indicating an annualized rate of 16.41 million units. In fact, November was the best sales month in six and a half years, as aggressive discounts helped boost revenue. However, many auto stocks sold off on worries surrounding these pricing incentives, some of which topped $2,500. Unhealthy pricing incentives contributed to the industry's slide in the years leading up to the recession.

GM had a very strong showing for the month, with total sales rocketing 14%, 212,060 vehicles sold in the United States, and retail sales soaring 19%. The Chevrolet Cruze, Equinox, and Volt had their best November sales ever, while retail sales for the Impala more than doubled. Management expects this strong performance to continue into next year, citing an improving jobs picture and lower energy prices.

Reacting to some investors' worries concerning the importance of incentives for GM's sales figures, the company's North American chief was quoted as saying that "this is not a purely incentive-fueled industry right now." Still, many analysts believe that incentives played a big part in November's sales..

Ford and Toyota did quite well, too, but didn't grow their top lines as fast as GM did. Ford reported sales growth of 7.2% for the period, while Toyota sales were up 10.1%. Ford is still seeing some very healthy demand for its F-150 pickup truck, as well as its Fusion sedan. The company will idle two Michigan factories for an extra week, though, in order to scale back inventories of the Fusion and the Focus.

Toyota's strong sales performance was led mainly by trucks, SUVs, and the Lexus brand. According to the Japanese auto giant's management, strong holiday sales were a sign of increased momentum, and showroom traffic surged over the holiday weekend.

Fundamentals and metrics

Comparing the three automakers discussed so far, GM clearly seems to be the most expensive based on its trailing P/E. The stock trades at 16.22 times trailing earnings, versus Ford's 11.7 and Toyota's 10.9. To a certain degree, a higher multiple may be justified, since the firm is putting up some very solid sales figures. On the other hand, it seems unlikely that the company's performance justifies such a large premium over the industry average, which currently stands at around 11.29 .

GM does have several things going for it. Going by the price-to-sales ratio, it's the cheapest of the bunch, and its debt load looks manageable. GM's cash position is strong, with around half of the company's market cap lying around in cash and short term investments. On the other hand, GM's operating margin of 1.79% looks very slim compared to the margins of the competition, and the company's return on equity of 13.27% is not awe-inspiring.

The bottom line

GM's performance over the last few years has been extremely impressive, a fact which reflects in its valuation at the moment. Currently, the firm trades at a fairly steep premium to the industry on a price to earnings basis. While GM's turnaround definitely merits a decent valuation, its sales and fundamentals do not seem to justify a considerably higher price-to-earnings ratio than its peers.


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  • Report this Comment On December 12, 2013, at 11:42 AM, TMFTwoCoins wrote:

    Daniel,

    GM also is the cheapest of the competitors you mention when looking at Forward P/E. It's still in the turnaround stages of shoring up its bottom line and is a couple years behind Ford -- meaning its trailing figures will be weaker than its forward figures. It's goal of 10% margins in the U.S. by 2015 will mark a drastic improvement and should justify its "expensive" look.

    GM has much upside, and isn't expensive, in my opinion. I'm very pro Ford, but I definitely think GM may have even more upside in terms of its valuation right now.

    Sincerely,

    The other Daniel

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