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Strong new products like the award-winning 2015 Chevrolet Colorado have begun to erase memories of poor GM vehicles of the past. Many more new products are expected to arrive at GM dealers over the next couple of years. Source: General Motors.
General Motors Company has been a mixed bag for investors since its return to the public markets in 2010.
Wall Street was high on GM as 2011 began, with the stock trading close to $40. But those sentiments soured by the end of that summer, as sluggish U.S. sales and worries about GM's pension obligation dragged shares down more than 40%.
But its stock recovered as new products showed convincing improvements and generated steady profits. Late last year, the U.S. government sold its last GM shares, and investors were beginning to believe that GM's new management had the company on the right track.
Shares were again around $40 as 2014 began -- only to fall back to the low $30s as GM's costly recall scandal erased most of the company's profits in the first half of the year. More recently, overseas pressures and lingering concerns about the recalls have kept the stock in the doldrums.
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Do GM investors have any reason for hope?
While there's no guarantee that GM's stock will recover its lost ground, there are good reasons to think that the General's shares will rise in time. Here are three.
Reason 1: The recall mess is weighing on GM stock, but it will fade
As I write this, GM's stock is trading at just over $31. With just $2.87 billion in net pretax income over the past four quarters, that gives the stock a price-to-earnings ratio of around 17 -- well above the 10 times earnings that has historically been considered fair value for a healthy GM.
So the stock is really expensive, right? Not really. To some extent, investors have factored out the impact of the recalls. Through the first three quarters of this year, costs associated with the recalls have knocked almost $3.8 billion off GM's bottom line. Add that back in, and GM's price-to-earnings ratio is a little over eight.
That suggests that the recalls are weighing on GM's valuation. And there are still reasons to be concerned about the impact of the scandal on GM's bottom line. Earlier in 2014, Toyotaended up paying $1.2 billion to the U.S. government to settle criminal charges related to its "sudden acceleration" recall scandal back in 2009 and 2010.
CEO Mary Barra has handled the scandal well after some initial stumbles, but it seems likely that GM will be making a similar donation to Uncle Sam's coffers before all is said and done. And there's a pile of civil litigation pending that could theoretically expose GM to significant further costs.
But as we've seen with Toyota, the costs and impact to GM's reputation associated with the recall mess will fade in time. And if we factor out the costs of the recall mess to date, and look at GM's underlying business -- which is pretty healthy, as we'll see -- the stock does look like it has room to rise.
Reason 2: GM is in the midst of a wave of new-product launches
GM's strong-selling full-size Chevy Silverado and GMC Sierra pickups? New for 2014. Likewise its award-winning Cadillac CTS and top-selling Chevy Impala sedans. And its segment-leading (and extremely profitable) full-size SUVs (Chevy Tahoe and Suburban, GMC Yukon, Cadillac Escalade) are all-new for 2015, along with the new midsize Chevy Colorado and GMC Canyon pickups.
GM is winning with more than trucks. New last year, the Chevrolet Impala sedan has been a pleasant surprise -- a refined, comfortable, fuel-efficient cruiser that earned a high ranking from Consumer Reports. Source: General Motors.
There's a lot more coming, too. An all-new (and hugely improved, we hear) Chevy Volt will be unveiled next month, and the long-awaited Cadillac CT6 sedan will bow in April. Both should be on sale this fall, joining the new small Chevy Trax SUV, refreshed versions of the Chevy Equinox and GMC Terrain crossovers, a new version of the tiny Chevy Spark, and possibly a new-to-the-U.S. midsize Buick crossover called the Envision, which just went on sale in China.
2016 brings another long list of new GM products, including an all-new Chevy Malibu sedan and a redesign of the popular GMC Acadia crossover.
So, why is all of this important? Because fresh products command higher prices. New models -- assuming that they're good, and most of GM's recent vehicles have been very good -- sell with fewer "incentives," or manufacturer-funded discounts. That means more profit for GM on every sale, and that means better profit margins -- and fatter pretax profits.
Reason 3: GM is already in better shape than you might think
GM's operating margin in North America was 9.5% last quarter, better than the 7.1% margin reported by Ford. Ford's margin dipped for good reasons, but GM posted a fine result -- one in line with its aggressive long-term goals.
Meanwhile, its money-torching European unit is on the verge of a turnaround, and is now expected to reach breakeven in 2016. China? GM sold over 3 million vehicles there last year, and will sell more in 2014. And GM is in the midst of a massive Asian expansion that will position it well for big sales and profits for years to come.
Cadillac already sells more of its big XTS sedans in China than it does in the U.S. A new factory under construction near Shanghai will begin building more Cadillacs for China next year. Source: General Motors.
GM's balance sheet looks good, too: As of the end of the third quarter, GM had $36.6 billion in cash and credit lines available, versus just $6.7 billion in (well-managed) long-term debt.
GM's management team is also better than you might think. The old generation of go-along-to-get-along GM leadership is gone. The new team, selected by former CEO Dan Akerson, is a mix of savvy outsiders (GM president Dan Ammann is a former Morgan Stanley analyst) and smart GM veterans like Barra who have embraced a long-term plan to transform GM into a global powerhouse that fully realizes its massive, but long-dormant, potential.
GM has always had spectacular R&D resources and massive global scale, but it hasn't ever come close to harnessing the potential of both. That has left it far behind giant archrivals Volkswagenand Toyota in terms of annual profits.
But now, Barra and team are taking the right steps to close that profit gap. And they're starting with a GM that is still facing big challenges, but is already in pretty good shape.
The article 3 Reasons General Motors Stock Could Rise originally appeared on Fool.com.
John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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