The Prudent Speculator has been a leading authority on value investing since 1977; the service focuses on undervalued stocks that should be held for 3 to 5 years. Here, contributing editor Jason Clark reviews two recommendations among the automakers.
General Motors (GM) posted much-better-than-expected Q4 profits, even as the recently high-flying shares gave back 1.5% on the week. The automaker turned in fourth quarter EPS of $1.93, versus the $1.56 estimate, while the revenue tally was $37.5 billion, compared to a $35.9 billion projection.
The problem, for short-sighted investors, was in the 2021 guidance as GM disappointed by acknowledging that production will be impacted by the industry-wide semiconductor shortage.
The company projected pretax income of $10 billion to $11 billion for the full year 2021, or $4.50 to $5.25 a share, with the chip issue accounting for a $1.5 billion to $2 billion hit.
We continue to like GM and believe that the company’s move away from sedans and towards trucks and SUVs was important and supplies the huge amounts of cash flow required to launch more than 30 EVs in the very near term.
The pivot to electric vehicles has been impressively swift across the entire industry (after a slow start) and we think it’ll prove valuable for a multitude of reasons.
Not unique to GM, but important, is that the company will have a variety of vehicles across the price spectrum with brands like Cadillac supposed to move entirely to EVs. Of course, GM was in the news last year for its investment in electric semi-truck manufacturer Nikola that went a bit sideways.
We would not be surprised to see other truck investments, but the main focus will be SUVs and crossovers in the near term. The valuation for GM isn’t as cheap as it once was, around 10 times forward earnings, but it remains a bargain in our view. Our Target Price has been lifted to $70.
Honda Motor (HMC) reported earnings of $1.58 per share in fiscal Q3 2021, ahead of the consensus estimate of $0.86. The company had $36.1 billion of revenue, compared to the $35.1 billion analysts were expecting.
The automobile and motorcycle maker cut unit sales estimates from 4.6 billion units to 4.5 billion units, but the pandemic has resulted in lower sales costs and less R&D.
As a result, Honda updated its guidance for the full fiscal year and now expects revenue near $123 billion (previously $126 billion) and earnings per share of $2.56 (previously $2.18). Honda also announced a cash dividend of $0.217 per share in Q4, bringing the yield near 3%.
Honda maintains a strong balance sheet compared to its peers, sporting $28 billion of cash and $42 billion of long-term debt, with plenty of room available on revolving loans should the company need them. The weighted average coupon is 1.55% and the weighted average maturity is 2.44 years.
Instead of competing in every category, Honda remains focused on controlling costs through fewer trim offerings and common size vehicle platforms, while a commitment to launch more hybrids and electric vehicles is sure to resonate with younger customers and help keep up with the competition.
HMC shares trade at 63% of book value. We continue to like the geographically diverse revenue stream, exposure to emerging markets (China and India) and prudent financial position. Our Target Price has been lifted to $39.