GM: Driving a Hard Bargain

03/23/2016 7:00 am EST


Our latest featured stock—a leading auto maker—has limited downside risk, with strong appreciation potential during the next 12 months. Bargains like this do not pop up very often, asserts Roy Ward, editor of Cabot Benjamin Graham Value Investor.

General Motors (GM) operates in a cyclical industry and therefore warrants medium risk ratings. Sales at GM are growing slowly, which has caused many investors to avoid buying or holding the stock.

The resulting low valuations, though, look attractive to me. GM sells at 6.2 times current EPS — which is quite low — and the 5.0% dividend yield is far better than most stocks and most bonds.

The company thrived for over 100 years until the 2008 financial crisis; a second disaster in 2013 and 2014 when GM was forced to recall millions of its vehicles with faulty ignition switches.

New CEO Mary Barra has led GM out of its problems and the company’s restructuring plan is proceeding ahead of schedule.

GM boasts a solid balance sheet with $15 billion of cash. Standard & Poor’s upped GM’s credit rating to investment grade with a stable outlook.  

Sales and earnings prospects for the future are robust, and the company will undoubtedly increase its quarterly dividend again in 2016.

After producing flat sales and earnings during the previous three years, earnings per share soared 65% in 2015 despite a 2% sales decline.

To calculate the price-to-earnings growth ratio – or PEG – I use the current price divided by the latest four quarters earnings per share.

This is then divided by the combined five-year forecast EPS growth rate and current dividend yield. The result is a PEG ratio is 0.42, which is very low.

GM shares will likely rise 30% and reach my minimum sell price of $39.91 within one year. Buy at $30.79 or below.

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By Roy Ward, Editor of Cabot Benjamin Graham Value Investor.

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