General Motors Is a Buy Despite Mixed End-Market Performance

General Motors (GM) shares have lost some steam in the past few days as Volkswagen’s (VLKAY) emission scandal has knocked the wind out of auto stocks. In addition, since GM relies on China for a large share of its sales, its financial performance has also been bad of late.

For instance, in the second quarter, GM’s net revenue was $38.2 billion as against $39.6 billion during the same period last year. The automobile manufacturer reported a slight year-over-year decline in its top line primarily driven by the negative impact of foreign exchange currency fluctuations.

Positives and negatives

GM saw weakness in a number of end markets.
For instance, it witnessed a decline in its combined wholesales for the second quarter, a reduction of approximately 38,000 units, mainly due to Brazil and Russia, and the shutting down of the Chevrolet brand in Europe. Market share for General Motors declined somewhat on a year-over-year basis owing to the impact of weaker sales in South America and the closure of the Chevrolet brand in Europe. The market share for Opel/Vauxhall brand grew somewhat, supported by the growth of its retail share in the U.S.

The year-over-year expansion in the company’s top line was somewhat offset by contraction of its market share in Russia and Brazil, in addition to the exit of Chevrolet brand from Europe.

However, General Motors reported excellent growth for the initial two quarters of this year with significantly capitalized on a solid North American market and continued strength in the key markets of China, in spite of a tough operational environment in China.

Importantly, General Motors has generated $3.3 billion of adjusted automotive free cash flows for the second quarter of 2015, up 74% from $1.9 billion in the second quarter of 2014. Further, year-till-date, GM has returned over $3.1 billion of cash to its key stakeholders by strategically repurchasing $2.1 billion worth of its shares and offering dividends of approximately $1.1 billion, in line with its commitment to deliver improved shareholder returns. Also, GM concluded the quarter with robust net automotive liquidity of about $34.9 billion.

Analyst sentiment is mixed

The analysts at Morgan Stanley have reiterated an Underweight rating on General Motors with a price target of $27. This is not surprising as investors must consider the impact of China shifting from a demand-driven market to a supply-driven market, thus accelerating deflation throughout the world in the form of component and capacity oversupply.

The consensus estimate among 20 investment analysts evaluating General Motors suggests that the company won’t outperform the market. This consensus rating has been maintained since analyst’s sentiments declined earlier. Thus, there’s a mix of investor’s sentiments on General Motors, some indicating significant growth prospects of the company while others suggesting market outperformance.

Conclusion

But in my opinion, investors are advised to purchase equity in General Motors Co. looking at the logical company valuations with trailing P/E and forward P/E ratios of 10.55 and 5.59, respectively, indicating low-cost of the stock and comparable to the industry’s average P/E of 11.31. The PEG ratio of 0.27 depicts healthy company growth which is better than the industry’s average of 0.51. Thus, GM’s recent weakness looks more like a buying opportunity that investors should consider.
Published on Sep 30, 2015
By Yaggyaseni Mittra

Copyrighted 2016. Content published with author's permission.

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