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Bull vs. Bear: General Motors

By John Rosevear and Chuck Saletta - May 28, 2016 at 11:06AM

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Is GM a screaming buy, or are the automaker's shares cheap for good reason? Two Fools battle it out.

Right now, GM is making big profits while selling lots of profitable trucks and SUVs. But does that make it a buy, or does it suggest that the company is headed for a big fall when the market turns? Image source: General Motors.

Is General Motors (GM 1.35%) a buy? Or is it a stock to run away from?

On one hand, Fool contributor John Rosevear thinks GM shares look temptingly cheap at current prices. But Fool contributor Chuck Saletta thinks there are good reasons to steer clear. What do you think? Have a look at their arguments and share your thoughts in the comments below.

Chuck Saletta
My biggest concern with General Motors is that it looks like it never really cleaned up its act after its 2009 bankruptcy. Its heavy cost structure means it's still largely dependent on trucks and SUVs to deliver its profits. But with gas prices starting to rise and the Federal Reserve indicating that interest-rate hikes are a real possibility , the twin engines of cheap debt and cheap gas fueling that big vehicle boom look likely to wind down.

In addition, General Motors still has quality-control issues, as evidenced by its recent need to stop selling 60,000 SUVs due to improperly stating their fuel economy. To top it all off, its union contracts have resumed their previous trend of increasing generosity.

As if that weren't enough, General Motors appears to be squandering the biggest benefit of that bankruptcy: its formerly clean balance sheet. Its total liabilities continue to climb, up to nearly $163 billion as of the end of March, from closer to $124 billion at the end of 2013. While General Motors isn't exactly in imminent danger of another bankruptcy, its current actions bear a striking resemblance to the mistakes that brought it down in the first place.

My Foolish colleague John Rosevear may very well point to General Motors' low trailing P/E ratio and strong dividend yield as reasons to believe that its stock is value-priced. Remember, though, that even without being haunted by the echo of its prior misdeeds, the car industry remains a cyclical one. Buying a cyclical company when its stock looks cheap based on backward-looking metrics is often a great way to lose money.

Ultimately, it's a company's future prospects, not its recent earnings, that drive its stock price. Unless General Motors proves itself capable of breaking free from the issues that caused its 2009 bankruptcy in the first place, its future simply looks too cloudy for me to justify investing my money.

John Rosevear
Not surprisingly, as a GM shareholder and bull, I think my esteemed Foolish colleague is wrong on nearly all counts. While I do agree that the U.S. new-vehicle market might be near its peak (and thus headed for a decline), I think that decline is already priced into the stock. I also agree that we buy stocks because of a company's future prospects -- and that makes GM a buy right now, because today's GM is a very well-managed company on a path to strong profit growth over the next several years, whether the U.S. market dips or not. 

Want proof that GM has changed? Here's a big one: The latest J.D. Power Vehicle Dependability Study ranks GM's quality right up there with Toyota's, and ahead of Honda's. While Chuck is correct that GM is making hay on the current strong global (not just U.S.) demand for SUVs and trucks, CEO Mary Barra isn't ignoring the vast changes expected to come to the auto business over the next several years. Far from it: GM has surged to the forefront of self-driving research, it will beat Tesla Motors to market with an affordable long-range electric car, and it's making big investments to become a major player in ridesharing and ride-hailing.

A lot of big automakers talk about becoming "mobility companies" in the future. GM is doing it now. 

More to the point for investors, Barra has set in motion a comprehensive plan to boost GM's profit significantly by early next decade. Already, profit margins have increased in the U.S., and GM's long-suffering European unit is finally being transformed into a durable profit center. Meanwhile, GM once again leads China's new-car market, and its China unit continues to post very strong margins.

As for that "total liabilities" figure, many investors new to automakers make the same mistake that Chuck did. Most of that eye-popping figure isn't GM debt, it's the liabilities on the balance sheet of its in-house bank. Banks borrow money from other institutions and lend it to their customers at a profit. That borrowed money shows up as liabilities, but it'll be repaid as the loans made by GM Financial are repaid. It's climbing because GM is working to boost that (profitable) arm of its business. The total debt attributable to GM's auto business -- GM's real debt -- was just $10.8 billion at the end of the first quarter, well below its $18.5 billion in cash. If and when times get tough, GM has an additional $12.1 billion in available credit lines to draw on. GM's balance sheet is in terrific shape.

Despite all that, and despite still-rising sales in the U.S., Europe, and China, GM is priced right now at less than five times its trailing-12-month earnings, versus the 10 to 12 times we'd normally expect with a big automaker. (And yes, that low price means that GM's dividend yield is right around 5%.) But I think GM is cheap right now because investors have already priced in a decline in the U.S. new-vehicle market, as well as uncertainty in China. But given the progress that GM has already made on Barra's profit growth plan, and its outstanding efforts to keep pace with (or jump ahead of) the Silicon Valley disruptors, I think all that uncertainty just means that GM is a terrific buy at current prices for a long-term-minded investor. 

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