General Motors Company (NYSE:GM) is battling a number of unpleasant issues currently, although they are not of the same magnitude as the Great Recession. Issues like vehicle recalls, tightening regulatory framework and slowdown in markets like China and Europe have kept some investors away from the stock. With some investors seemingly becoming increasingly concerned about GM’s future, the stock price has been sliding.
At around $31.50 a share, the stock of General Motors is nearly 20% below its 52-week high and just about $2 above the 52-week low. The downward slide of the stock has been triggered by alleged uncertainty in General Motors’ business, especially how the future will be in the long run.
However, a closer look at General Motors shows that many investors misread the company, and the stock is actually cheap at the current levels, especially when compared to other auto stocks. General Motors stock trades at 7.17 times forward earnings at a time when Ford Motor Company (NYSE:F) is trading at 8.64 times forward earnings. Toyota Motor Corp. (NYSE:TM) on the other hand trades at 10.15 times 2016 earnings. These P/E multiples shows that GM stock is currently cheaper than peers Ford and Toyota.
Additionally, with the stock trading at nearly 20% below the 52-week high and almost the 52-week low, it shows huge upside potential and low downside risk.
Famous investors accumulating GM shares
The fact that General Motors Company is currently cheap and the stock has an attractive future can be seen in the way large institutional investors are playing the stock. Hedge funds are accumulating General Motors shares as if they are taking advantage of the cheap price.
For instance, Appaloosa Management LP disclosed a stake of 18.8 million shares in GM at the end of the second quarter 2015, valued at $626.47 million. The fund previously owned just about 15.3 million shares in GM at the end of the first quarter 2015. Other famous investors, like Greenlight Capital (NASDAQ:GLRE) and Soroban Capital, have also either raised stakes or initiated fresh positions in GM in the recent quarter. Apparently, these moves point to something interesting about the stock and retail investors need to wake up and smell the coffee.
Risky bets or evidence-backed investments?
What is it that could be making General Motors so attractive that hedge funds are jostling for a slice of the stock? There are two things here. It could be that someone, hedge fund managers in this case, is making dangerously risky bets on GM’s future, in which case they will regret it. The alternative is that there is something really compelling about GM that these investors have seen.
A closer look at General Motors shows that investment in the stock is backed by evidence despite things currently looking a bit out of place.
GM outlines $1 billion investment in India
In the next 15 years, India’s auto industry is expected grow exponentially to reach a value of $150-$200 billion. General Motors is positioning itself to take advantage of this multibillion dollar auto market. The company plans to invest $1 billion in India’s auto market over the next few years.
India’s auto market projections:
India is expected to gain a spot among the top three largest auto markets in the world by 2030.
Annual auto sales in the Asian country are expected to surpass 10 million units. Just about 2.5 million vehicles were sold in India in 2014. Looking at the target of 10 million units, India’s market looks poised for near meteoric growth over the next several years.
GM’s approach in India:
Given its past failed attempts to break into India’s auto market, General Motors has pulled a new strategy. The company is looking at nearly-custom vehicle designs for the Indian market. Previously, GM simply reintroduced vehicles designed for other markets in India. The strategy hasn’t worked well and the company continues to make losses in the market, which calls for a change in strategy.
General Motors looks to introduce some 10 vehicle models in India over the next five years. The company will be looking to wow Indians with low-cost cars, a strategy that has seemed to work well for rivals from Korea and Japan playing in India. General Motors is partnering with Shanghai Automotive Industry Corp. (SAIC) to bolster its competitive edge in India, especially in making more affordable cars.
In its new offensive in India, General Motors also plans to consolidate its manufacturing in the country. GM plans to close its Chevy production plant in Gujarat and shift manufacturing to Talegaon plant in Maharashtra, where it intends to raise capacity.
The adjustment in capacity in India by closing the Gujarat facility is expected to allow GM to take a more cautious approach in the market by lower operating costs.
Impact of moving strongly in India:
Successfully push in India is expected to drive significant gains for General Motors over the years given the huge size of the market – up to $200 billion by 2030.
Fleet sales story
In the previous month, General Motors’s U.S. auto sales rose 6.4%. During the month, fleet sales were down just 17.4% of the total sales from 24.2% in the same month in the previous year.
Usually, GM, like most other auto makers, sells to fleet customers at huge discounts, which means lower profit margins. As such, the company has to sell more vehicles to cover the steep discounts offered to fleet and rental customers. The decline in fleet sales means that GM is enjoying higher average selling prices for its vehicles, thus better margins.
Therefore, a decline in fleet sales is good news for GM and the recent trend is inspiring.
Important markets
General Motors is looking for growth overseas in China, India and Latin America. However, North America remains its most important market. It is imperative to make that clear because it means that the slowdown in China, that has caused panic elsewhere, won’t have as much damage on GM’s performance. Additionally, China’s troubles will also not last forever and when things firm up, GM will be there to increase sales in the market.
In Europe, GM is waging a successful war with margins improving in the first half of 2015, despite decline in sales.
As such, GM’s troubled markets today are opportunities for tomorrow.
Low interest rates
The low interest rates environment bodes well for General Motors. It means that more people can borrow car loans cheaply, thus increasing auto sales. The situation would be especially great for GM given reports that the company is outselling Ford in the trucks space.
$20 billion cash backup
General Motors is looking to maintain a cash reserve of $20 billion to ensure that it is able to survive a tough situation like the Great Recession. Having learned a lesson the hard way, GM is careful to take early measures, which explains the $20 billion cash reserve target.
Solid cash backup creates a more resilient business, which goes a long way to firm investor confidence. It is the way GM is trying to make itself resilient by putting aside emergency funds that many investors haven’t appreciated in the stock, thus the discounted price.
Shareholder-friendly capital allocation
As General Motors seeks to maintain a significant cash threshold throughout, the company said it will return excess cash to shareholders. Usually, the company rewards shareholders through stock repurchases and dividends.
So far this year, GM has returned $3.1 billion to its shareholders, with $2.1 billion coming through buybacks and $1 billion through dividends. Over the course of the last 12 months, GM has returned $4 billion to shareholders, divided equally between buybacks and dividends.
By retiring some shares, GM creates room for EPS growth and increases dividends per share.
Bottom line
General Motors is cheap, and that is partly because investors, scared about passing clouds like recalls and slowdown in China, haven’t appreciated the potential in the stock. Fast movers will certainly have a lot to show for their courage.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.