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General Motors Stock Is Too Cheap to Pass Up

By Adam Levine-Weinberg – Mar 25, 2018 at 9:35AM

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GM faces several headwinds, such as a U.S. auto market that is past its cyclical peak and potential backlash against U.S. tariffs in China. But General Motors stock still shouldn't trade for 6 times earnings.

Shares of General Motors (GM -1.03%) rallied during 2017, driven by strong earnings results and growing enthusiasm about GM's investments in autonomous vehicles and electric vehicles. Yet even at the stock's peak of $46.76, it still traded for around 7 times earnings, less than half of the broader market's earnings multiple.

Since peaking in October, General Motors stock has plunged again, falling more than 20%. As a result, shares now trade for less than 6 times earnings. This represents a spectacular buying opportunity for long-term investors.

GM Chart

General Motors Stock Performance, data by YCharts.

Fear reigns

General Motors has achieved spectacular financial results over the past three years. Adjusted earnings per share more than doubled during this period, rising from $3.05 in 2014 to $6.62 last year. Strong margins in North America, growth of the GM Financial ancillary business, and the company's exit from Europe all contributed to this performance.

Crosstown rival Ford Motor (F -2.00%) hasn't been so fortunate. Ford's adjusted EPS has increased by a more modest 33% over the past three years. Adjusted EPS peaked at $1.93 in 2015 but slipped to $1.76 in 2016 and $1.78 in 2017.

This discrepancy in performance would seem to suggest that GM is well equipped to deal with the challenges that automakers face on a routine basis. Nevertheless, General Motors stock has plummeted over three big fears.

First, U.S. auto sales reached a cyclical peak in 2017. Many pundits have warned that this means EPS is bound to decline, pulling General Motors stock down with it.

A red Chevy Traverse parked on snow

Many investors think declining U.S. auto sales will undermine GM's earnings. Image source: General Motors.

Second, the announcement of new tariffs on aluminum and steel has caused investors to worry that rising commodity costs will pinch profits. Third, the recent fatal accident involving an Uber autonomous vehicle has shaken investors' faith in the promise of autonomous vehicles, at least in the near term.

Steel and aluminum tariffs: no big deal

Many of these fears are overblown. For example, the steel and aluminum tariffs are quickly losing their bite. Two weeks ago, the Trump administration exempted Canada and Mexico from the tariffs. More recently, it added the EU, Argentina, Australia, Brazil, and South Korea to the exempt list. Steel and aluminum importers can also apply for company-specific tariff exemptions.

There will still probably be some impact on steel and aluminum prices from the tariffs, but it won't cause an unusually big spike in commodity costs. Automakers have been able to raise prices at a steady rate in recent years to offset cost increases like this one.

The Trump administration's recent decision to slap broad tariffs on China could have a bigger impact, if it leads to a backlash in China against products seen as "American." To some extent, GM has insured against this risk through the extraordinary growth of Baojun, its homegrown Chinese brand. In addition, consumer backlash against foreign companies in China tends to be short-lived. Within a couple of years, it's back to business as usual.

GM is a better bet than Ford

There are a few reasons General Motors stock looks more appealing than Ford shares right now. First, Ford stock is slightly more expensive at 7 times forward earnings compared to 6 times earnings for GM, despite GM's superior track record in recent years.

Second, product cycles are almost as important as economic cycles in determining success in the auto market. General Motors has an edge there, with a slew of new high-margin truck and SUV product launches scheduled for 2018 and 2019. This lineup will help the company keep its sales relatively stable through market share gains.

Third, GM has a big lead over most of its rivals in terms of electric-vehicle and autonomous-vehicle development. It's still not clear how quickly these new technologies will be adopted, but these investments put the General in a good position to counter future disruptive threats.

Given the mix of opportunities and threats that GM faces, General Motors stock is probably worth at least 50% more than its current price. (That would still be a modest valuation of 9 times earnings.) Patient investors will benefit from a 4.2% dividend yield while they wait for the rest of the market to catch on to GM's long-term strength.

Adam Levine-Weinberg owns shares of General Motors. The Motley Fool owns shares of and recommends Ford. The Motley Fool has a disclosure policy.

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General Motors Stock Quote
General Motors
$39.34 (-1.03%) $0.41
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Ford Motor
$13.47 (-2.00%) $0.28

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