General Motors (GM) continues to improve, with GM stock up about 23% year to date and 41% since last October on strong vehicle sales and improvements in profits.
Furthermore, the U.S. Treasury just sold back another chunk of GM stock this September.
With GM stock riding a wave of bullish sentiment, a revamped vehicle line sparking consumer demand and stability in overseas markets … this could be one heck of a quarter when the Detroit automaker reveals its earnings Oct. 30.
And investors who aren’t afraid of a little risk could be well served by considering a bigger position in GM stock.
But General Motors stock remains much cheaper than its rivals, and could be a big buy right now.
GM Earnings Preview
Wall Street is clearly looking forward to a big General Motors earnings report. After strong earnings in July, RBC and Barclays both put recommendations on the stock, with targets of $45 and $48 respectively. And in September, Deutsche Bank reiterated its “buy” rating on the automaker with a $46 price target.
Those targets predict 27% to 36% upside in GM stock from here.
Of course, General Motors earnings in July were down slightly year-over-year, but they easily beat expectations and a $500 million charge was attributable to a tax issue and not core operations. Cost cutting and efficiency in Europe reduced losses there and, given the recent strength in the region, it’s possible General Motors earnings could soon show a return to profitability in the EU.
Since Europe represents about 15% of all revenue currently, that’s no small feat.
Furthermore, the GMC Sierra and Chevy Silverado redesigns helped push General Motors profits higher since these pickups have much higher margins than compact cars. And at the same time, GM posted record global sales in the first half of 2013 on a volume basis.
When both margins and volume are moving higher, that’s a great place to be.
Sure, things are still pretty uncertain in Europe … but the recovery in GM stock has taken place even without a demand-driven recovery for auto sales. And with big brands like Chevrolet, Cadillac and Buick still very much in demand around the globe, it’s always hard to count out General Motors if auto sales continue to see improvement worldwide.
Risks to GM Stock
Of course, GM stock is not foolproof. Since posting those July numbers that beat expectations, the Detroit automaker has really gone nowhere with a 90-day return of about -3% vs. a 3% gain for the S&P 500 in the same period.
And given the troubles in America after the government shutdown, a slowing of consumer spending could affect vehicle sales across the board — not just for Chevy and Cadillac lines but also Ford, Toyota and competitors.
Still, in the face of these risks there’s a lot going for GM. The forward price-to-earnings ratio is a mere 7.6, compared with a multiple of about 10 for Ford and Toyota.
Also, “Government Motors” continues to rapidly shed its bailout money and return to private ownership. In September, the U.S. Treasury sold about $570 million in GM stock, reducing the government’s stake in General Motors to just 7.3%. That’s down from 13.8% in June and 26% after the massive $23 billion IPO of GM stock in 2010.
Bigger picture, this continues to be a story of General Motors getting back on track in the wake of the financial crisis and resulting recession. The government is less involved, operations are more efficient and secular vehicle trends continue to point up. It’s estimated that over 16 million vehicles will be sold in 2014, bringing us back to pre-crisis levels.
GM will surely benefit from this in the longer term. And as we approach General Motors earnings on Oct. 30, there’s a lot of optimism that this Detroit auto stock will continue to show it’s bouncing back.
Related Reading on GM
- How Europe cost cutting aided GM earnings last quarter. (Reuters)
- Revamped truck lines have been boosting both Ford and GM stock in 2013. (The Slant)
- Check out GM filings with the SEC to get primary source info on sales and profits. (GM.com)
- Look out – a new Camaro Z-28 is coming in 2014. (Car and Driver)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.