General Motors (GM -1.85%) pays a quarterly dividend of $0.09 per share, good for a yield of under 1%. That return of cash to shareholders is about the only positive thing you can say about the company from an investment perspective.
That's because over the past five years, the stock has been a dud, rising less than 2% compared to the S&P 500's 60% gain (as of July 26). Even in 2023, GM shares have lagged the broader index.
The business's latest financials, however, might convince you that the stock, which trades at a price-to-earnings ratio of 5.9, is a no-brainer buy right now. But there's also a notable red flag that can't be ignored.
Let's take a closer look at the good qualities and the bad characteristics of this automotive stock.
Image source: Getty Images.
Green flag: GM is benefiting from strong momentum
For the three-month period that ended June 30, the business recorded revenue of $44.7 billion and adjusted diluted earnings per share of $1.91, up 25% and 68%, respectively, on a year-over-year basis. These headline figures beat what Wall Street analysts were expecting.
The solid results pushed management to boost full-year guidance. The leadership team now believes that GM will register adjusted operating profit of between $12 billion and $14 billion in 2023, up from guidance of $12 billion (at the midpoint) that was given just three months ago.
Key to this quarter's results is the easing of supply chain problems, which were a huge issue throughout 2022. GM sold 1.6 million units in the latest period versus 1.4 million in second-quarter 2022. And it now has dealer inventories in the U.S. that are 73% greater than they were a year ago. This positions the business well for rising demand.
Through the first six months of 2023, GM produced 50,000 electric vehicles (EVs). In the second half of the year, the company plans to begin production of EV models of the Chevy Blazer, Chevy Equinox, and Chevy Silverado.
What's also impressive is that GM is posting strong growth in the face of what has generally been a difficult macroeconomic environment. Interest rates are much higher than they were a year ago, yet GM is selling more cars and putting up higher revenue. That's certainly an encouraging sign.
As it relates to the cost structure, management now expects to reduce expenses by $3 billion through the end of next year. Before, they thought they could cut costs by $2 billion. This should help boost margins in the near term.
Red flag: GM is still an auto manufacturer
Despite positive momentum working in its favor, investors can't forget that GM is still an auto manufacturer. This results in some unfavorable qualities to keep in mind.
While operating profits were up meaningfully in Q2, the margin was still a paltry 6.3%. Over the past five years, this metric has averaged about 5.2%. The leadership team must constantly be doing a delicate dance between managing pricing and inventory to match demand. At the same time, they have to keep costs under control. In other words, there isn't much wiggle room before margins get crushed.
GM operates in an extremely competitive industry, which means pricing power will be hard to exercise and profitability will always be difficult to expand. GM has to deal with domestic and foreign rivals that all have the technological and financial resources to keep it on its toes.
And investors can't forget about the cyclical nature of the automotive industry. Big-ticket purchases like cars that are also influenced by interest rates face boom-and-bust cycles that go with the flow of the broader economy. GM can't do anything about this reality, as it's entirely outside the company's control.
Therefore, in my opinion, the red flag substantially outweighs the green flag, forcing me to avoid adding GM shares to my portfolio.
