General Motors (GM) Is a Compelling Investment

General Motors has posted a better-than-expected profit but missed on revenues. The explanation is based on good performance in the U.S. The company obtained a pretax profit of $2.78 billion, compared with $1.39 billion in the second quarter of the previous year. In the international division, which includes China, it reported an increase of 10% in the same period of 2014.

Chief Financial Officer Chuck Stevens said, "Overall, the translation of non U.S.-based currencies was worth about $2.2 billion... If you exclude that, our revenue was up close to a billion dollars year-over-year, with strength really in North America … But strength, importantly in North America and China, very much unplanned as expected.

And we would expect the second half to be better than the first half".

General Motors reported adjusted earnings per share of $1.29, which more than doubled the earnings obtained in the same quarter a year ago and were higher than estimates by $0.23. On the other hand, revenue at $38.18 billion was smaller than analyst's estimates and also lower than the $39.6 billion obtained in the same time frame the year before.

Unfortunately in other regions it had a bad performance in the quarter. In Europe, the automaker lost $45 million and a loss of $144 million was reported in South America. Despite the current scenario the Chinese economy is facing, General Motors plans to reduce costs to offset slower sales. The last figures for new car registrations in July were down 6.6% year over year. The cost reduction does not mean that it will not continue to invest in this market because it is believed to be a multibillion-dollar market in the future.

Returning Value

The company bought back shares and paid dividends for about $3.2 billion. Further, due to activist investors' pressure, it agreed to repurchase $5 billion of shares by the end of 2016.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 11.57x, trading at a discount compared to a median of 18.6x for the industry which means that is relatively undervalued compared to its peers.

Final Comment

The company pays an annual dividend of $1.44, which represents as of today's close an attractive yield of 4.7%. The stock plunged about 10% in a year-to-date basis and more than 8% in the past 12 months. Despite this, a great portion of the EBIT comes from North America, which means that it will not be hurt by a stronger dollar.

The founder of Austin-based Century Management Arnold Van Den Berg initiated a new position with 478,985 shares in the second quarter, value at $15 million at current market prices.

Published on Aug 18, 2015
By Omar Venerio
Capital Markets, Derivatives and Financial Management Professor, Master in Finance and CFA candidate. I am an independent trader of stocks and options and passionate about the stock market.

Copyrighted 2020. Content published with author's permission.

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