If there was a Rodney Dangerfield of stocks, General Motors (GM 0.48%)would make a good candidate. The venerable automaker, as Mr. Dangerfield might say, gets no respect.
While the company has made smart investments in electric vehicles (EVs) and autonomous vehicles (AVs) and delivered strong profit growth, the stock has gone absolutely nowhere in the last decade. Just take a look at the chart below.
As you can see, GM stock is actually down slightly over the last ten years, even as operating income has roughly tripled over that time, depending on what you use as your starting point.
A wide range of factors explains GM stock's struggles during that time. Investors have chosen to bet on pure-play EV stocks like Tesla and Rivian to lead the next generation of automobile manufacturing, and the auto sector is notoriously cyclical -- fears of a recession have hovered over the market for nearly two years, even as GM's profits have grown.
More recently, rising interest rates have made buying a car more expensive as borrowing costs go up, which could dissuade some potential new car buyers, as well as squeezing the broader economy.
Finally, the recent United Auto Workers strike also pushed the stock lower and could substantially delay production on some new vehicles, giving an advantage to non-union automakers like Tesla, in addition to foreign competitors.
Image source: General Motors.
A golden opportunity or a value trap?
The above combination of rising profits and a stagnant share price has created what looks like a drop-dead bargain, according to traditional metrics. It currently trades at a price-to-earnings ratio of just 4, about as cheap a valuation as you'll find for a healthy company. That kind of P/E ratio generally indicates a business in sustained decline, or one at the top of the economic cycle, whose profits have already peaked.
Analysts do expect GM's profits to fall over the coming quarters, a reflection of the macroeconomic headwinds, but even based on the consensus EPS forecast of $7.01 for 2024, the stock trades at less than five times earnings. And those estimates have gone up significantly over the last two months since it raised its guidance in its second-quarter earnings report.
Wall Street itself is clearly bullish, with the average analyst calling for GM stock to gain 52% over the next year to reach $50.53.
The path to unlocking gains
For most stocks, an improvement in the financial performance would be enough to drive shares higher, but that doesn't seem to be the case with GM. Despite the strong recent results, the stock's valuation indicates that investors are skeptical of its long-term profit stream.
In addition to delivering increasing profits, the company has also been ramping up production of EVs, producing 50,000 electric vehicles in North America in the first half of the year, and it's on target to make 100,000 EVs in the second half of 2023. That's well ahead of high-priced EV start-ups like Rivian and Lucid.
Additionally, thanks to its 80% stake in Cruise, GM is one of the leaders in AVs. Its autonomous Cruise vehicles are already on the road in San Francisco, doing 10,000 rides per week in the second quarter. Cruise CEO Kyle Vogt said on the second-quarter earnings call, "We believe we're the only AV company with a well-defined and significantly de-risked path to reach billions in revenue."
Despite those accomplishments, investors are taking a dim view of the stock. And in order for it to break out, it will have to convince the market it deserves a higher multiple.
GM can do that by showing meaningful revenue growth and profits from its EV and AV divisions, or by overcoming the current economic headwinds.
Investor perception can be slow to shift, but GM looks like a steal at the current price. If the economy avoids a recession and GM continues to execute, the stock looks like a good bet to outperform over the next year or two.
