What is it going to take for General Motors to catapult to new heights?
By Brian Nelson, CFA
August was a busy month for the auto makers. Following General Motors’ (GM) fantastic second-quarter results in late July, we thought shares of the auto giant would have surged higher, but they have been stuck in neutral, despite what we consider to be a very, very attractive valuation and an equally attractive dividend yield. Read why we think “General Motors May Offer an Incredible Opportunity (July 2017).” Where Tesla (TSLA) and Ferrari (RACE) are trading at rather high valuation multiples, poor GM can’t even get a double-digit multiple on current-year earnings, despite what we consider to be a solid balance sheet. What is it going to take for General Motors to catapult to new heights?
Unfortunately, in GM’s case, it doesn’t appear that valuation and the dividend will combine to act as the catalyst, so we think the executive team may need to find a way to improve the “story” around the stock. As a fundamental, cash-flow based research entity, we care very little about “stories,” but in a market where entities like Tesla are building “castles in the air” on the backs of the hopes of investors, we can’t help but think that some “rhetoric” around the future innovative direction of GM would serve investors well. We continue to believe GM is a fascinating investment consideration, but investors seem like they need something to talk about these days. Hopefully, the executive team at GM will deliver on this sooner than later.
GM recently completed the sale of its Opel and Vauxhall brands to PSA Group (PEUGF), a logical move given the company’s troubles in Europe, but we think GM has to be more aggressive and on the acquisitive front. Some investors may be worried about ignition-switch litigation or recent recalls, but it’s hard to say that the market is not building in an Armageddon-case given where shares are trading at. Similar to how Great Wall Motor (GWLLF, GWLLY) has reportedly been pursuing Fiat Chrysler Automobiles (FCAU), GM needs to get the investment community to start talking about its future, whether through a big deal of its own, and it may even need to come after Tesla competitively in a big way–or find a way to be more forward-leaning in the space, perhaps in a more capital-light capacity. For example, Uber and Lyft have revolutionized ride-sharing services, and GM must work to find its very own “next big thing.”
GM: Get investors talking about your future! Your valuation is attractive, the dividend is sound, but investors are missing the “storyline.” You need to change the public’s perception from one of a tax-funded bailout to one where GM should not only garner a market multiple of 17+ times but arguably one that should be higher than that. There is absolutely no possible way you can sit idly by while the market assigns a castle-in-the-air valuation to Tesla. Do what you do best GM: make cars that consumers want but get them talking about “the next big thing” out of your pipeline. Shareholders might be rewarded handsomely if you do. Fantastic sales performance and improved inventory, as we witnessed in August, may not be enough. Start dazzling investors with your talk about the future. Give the public something to wonder about!
GM is included in both newsletter portfolios.
Auto Manufacturers: F, GM, HMC, HOG, TM, TSLA
Related ETFs: CARZ