It's not just the high-flying tech stocks that are performing well lately. Established carmaker General Motors (GM 0.48%) has seen its shares soar 45% just in the last four months as investor sentiment shifts into high gear. That gain beats the S&P 500 during the same period.
There are a lot of different factors to consider before investors can decide what to do with GM as it relates to their portfolios. Let's analyze both the positive and negative factors surrounding this business and stock.
The bullish case
One compelling reason that investors might want to scoop up shares is that GM is experiencing solid business momentum. The company crushed Wall Street expectations in the fourth quarter of last year. Revenue came in just shy of $43 billion, with adjusted earnings per share totaling $1.24.
Executives forecast a similar industry environment in 2024. But thanks to cost savings efforts, they believe net income will be $10.5 billion this year (at the midpoint), higher than the $10.1 billion registered in 2023.
Some investors will appreciate the company's favorable capital allocation policy. In 2023, GM generated $11.7 billion of automotive free cash flow. The leadership team used $11.1 billion to repurchase shares.
GM shares have had a good year thus far, but they remain 38% below their all-time high (as of March 18). And they are trading at a cheap valuation. The current price-to-earnings ratio of 5.6 is about half that of rival Ford. Value-focused investors might find this opportunity too hard to pass up.
The bearish case
It's easy to get caught up in the recent business momentum for GM, but I think the reasons to avoid the stock altogether make for a very compelling argument. Investors can't ignore that this is still an automaker. And this brings about some very unfavorable factors.
For starters, growth and profitability trends aren't anything for investors to get excited about. In the past 10 years, GM's revenue has increased at a compound annual rate of 1%. The global automotive industry is extremely mature. The number of passenger vehicles sold worldwide in 2022 was only 12% higher than the figure in 2010. This doesn't provide a favorable backdrop for most businesses in the sector.
And when it comes to profitability, the company's operating margin has averaged just 5.8% in the past five years. The business hasn't shown the ability to expand its margins over time. GM must make massive cash outlays in factories, labor, and car components, while competitors are doing the exact same thing. This isn't encouraging about the future direction of margins.
Investors need to be OK with the cyclicality of the industry. Consumers' willingness and ability to spend on new vehicles is heavily influenced by macroeconomic forces, most notably interest rates. Higher borrowing costs can discourage people from buying cars. GM has no control over what the Federal Reserve will do, adding risk and uncertainty.
Electric vehicles are an area where competition and macro headwinds are rearing their ugly heads. Management admits that growth here is slowing, even though they still have plans to boost manufacturing capacity to be able to produce more units in the future. This points to the fact that even as the industry is undergoing changes for a more sustainable future, GM can't escape the reality of being a carmaker. Demand isn't automatically going to pick up from historical norms.
In the last 10 years, GM shares have returned 53%, including dividends. Had you invested in the S&P 500 instead, that capital would've returned an impressive 232%. That disappointing track record is another reason I believe it's best to avoid this stock right now.
