General Motors (GM +3.77%) has been a terrific business to have owned this year. Shares have climbed 30% in 2024 (as of Aug. 22), easily outpacing the 18% rise of the broader S&P 500 index.
The Detroit carmaker is pleasing its shareholders during a time when its crosstown rival, Ford, has dropped 10%. But is GM a smart buy right now? Let's look at both the bull and bear cases for this auto stock.
GM's momentum
GM's business is performing well, as the company's second-quarter 2024 (ended June 30) financial results came in well ahead of Wall Street expectations. Registering impressive top-line performance, with sales totaling just under $48 billion, was a key highlight. Pricing continues to be a tailwind.
The leadership team was pleased enough with the numbers that they raised full-year guidance. Adjusted earnings before interest and taxes are now forecast to total $14 billion (at the midpoint) in 2024.
Like most automakers, GM is pushing aggressively into the electric vehicle (EV) space. Unsurprisingly, the business posted 40% year-over-year unit sales growth in the EV division, faster than the industry overall. The Cadillac LYRIQ, GMC Hummer EV, and Chevrolet Blazer EV are drumming up interest from buyers.
However, it wasn't all good news. That growth wasn't enough to prevent management from scaling back on EV-related investments. Besides demand trends being softer than industry executives had hoped, it's also hard to ignore just how competitive this area is. Plus, GM is still a long way from being profitable when it comes to selling EVs.
NYSE: GM
Key Data Points
Is GM a quality business?
I think investors would do much better if they only focused on high-quality companies. These are the ones you want to own for the long haul. One way to identify such businesses is to look for an economic moat, a term made popular by Warren Buffett. In my opinion, GM doesn't possess one.
For example, I don't believe the business has a brand advantage. Competition in the industry is incredibly fierce. And I'm positive that in the eyes of consumers, pricing is perhaps the single most important factor when making a purchasing decision. Moreover, there are larger car companies in the world than this one, with greater brand recognition.
Piggybacking off the argument that this is not a quality enterprise, I'll point to the financially troubling nature of the auto industry. Companies must always spend heavily on capital expenditures to expand manufacturing capacity or on research and development. And these outlays are required just to maintain current operations, let alone achieve growth.
Besides marketing expenses, GM has to deal with commodity and labor costs. Changes here can often be outside of its control. That typically leads to low operating margins.
GM is a cheap stock
Despite the unfavorable qualities, which I believe long-term investors shouldn't ignore, someone might still want to own GM shares because of the valuation.
The stock currently trades at a price-to-earnings ratio of 5.3. That's not a typo. When the market is hitting all-time highs, it's startling to find a company trading at such a cheap multiple, one that represents a huge 78% discount to the broader S&P 500.
Additionally, investors can definitely appreciate management's aggressive stock buybacks, which have helped to reduce the outstanding share count by a whopping 18% in the past 12 months. "Considering our belief that GM's share price is still undervalued, you should expect us to remain active in future share repurchases," CFO Paul Jacobson said on the latest earnings call.
That sounds great, but I still don't view GM as a worthy business to own. So I have no problem passing on the stock.
