GM: Good Management, Good Value

02/08/2016 8:00 am EST

Focus: STOCKS

Timothy Lutts

Publisher, Cabot Heritage Corporation

Good management—under forward-thinking nature of CEO Mary Barra—is a key factor in the revitalization of our latest stock of the month, a 108-year-old auto company, asserts Timothy Lutts, editor of Cabot Stock of the Month.

General Motors (GM) has been in the news lately because business is booming, as cheap gasoline drives consumers back to high margin trucks and SUVs.

But that’s not enough to make the stock a good investment, particularly if oil prices start rising. More importantly, what we focus on are the stock’s valuation and its dividend.

On the valuation side, GM’s price:earnings ratio is a remarkably low 6. By comparison, the P/E ratio of the S&P 500 is 21.

Furthermore, while GM sells $152 billion of vehicles in a year, the stock’s market capitalization is just $46 billion. That’s pretty low.

But valuation alone won’t move a stock if investors see no growth. And while cheap oil has been a short-term tonic for GM, I think the real growth in the future will come from technological innovation.

For example, GM invested $500 million in Lyft, launched car-sharing service Maven, and plans to develop an on-demand network of self-driving cars.

And it rolled out the Chevrolet Bolt, an electric car that promises 200 miles of all-electric range at half the price of a Tesla Model S.

On the downside, growing competition from low-cost manufacturers in China is a threat; also, the legal developments over faulty ignition switches continue to drag on the stock.

Analysts have been raising their estimates, seeing earnings growing 14% in 2016. When you compare that 14% growth rate to the P/E ratio of 6, the only conclusion is that GM is cheap.

And then there’s the dividend; GM now yields 4.9%. Also, there’s a $9 billion stock buyback program in place.

Short-term, the stock could drop to support at $28 or even $26. Long-term, however, the stock shows a peak at $41.85 at the end of 2013 and a bottom at $24.62 last August (a drop of 41%).

To me, that’s a decent set-up for a value stock, particularly if you’re a patient investor with an appetite for good dividends.

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