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GM and the Upside of Low Oil
08/20/2015 8:00 am EST
We have seen a precipitous drop in oil and gas prices. But notice how the media has focused almost entirely on the negative ramifications, argues Mark Skousen, editor of High-Income Alert.
But cheap oil is creating big winners, too. One of them is the major auto makers, including General Motors (GM).
GM is one of the world’s largest auto makers, with well-known brands such as Chevrolet, Buick, GMC, Cadillac, Isuzu, and Opel, among others.
It sells cars and trucks to dealers for consumer retail sales, but it also sells to fleet customers, rental car companies, leasing companies, and government agencies.
Last quarter, the automaker reported stronger-than-expected earnings of $1.1 billion, with profit boosts coming from both North America and China, its largest market.
In fact, GM set a record for adjusted earnings and profit margin for any quarter since emerging from bankruptcy as a new company in 2009.
Moreover, management sees the winning streak continuing. Chief financial officer Chuck Stevens said he’s confident the firm will be able to sustain the strong performance in the second half.
The drop in oil is about to make gasoline considerably cheaper. Analysts believe it soon will fall below $2 a gallon nationally. That benefits automakers in two major ways.
The first is that motorists will drive more miles and therefore are more likely to upgrade aging vehicles. The second is consumers will have more discretionary income in their pockets and that makes auto payments more affordable.
Credit standards are getting more lenient, too. According to Bloomberg, the rejection rate for auto loan applications has never been lower.
In the first half of the year, GM’s earnings before interest and taxes totaled nearly $5 billion. CEO Mary Barra says that figure will be even higher in the second half.
Yet this stock is extraordinarily cheap. GM sells for less than 1.5 times book value and only 33% of sales. No wonder Director Joseph Jimenez just bought 32,000 shares, an investment of more than $1 million.
Plus, you’ll collect a 4.6% yield here. And that dividend—along with earnings—is likely to rise in the months ahead.
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