In this article, let's take a look at General Motors Company (GM, Financial), a $54.61 billion market cap company, which is the world's second-largest producer of cars and trucks.
A market leader
When talking about car models, the company has the best quality and design. It is a leader in truck models as well so when vehicle demand recovers the firm will be in an excellent position to grow its earnings. Additionally, demand for U.S. light vehicles is around 16 million to 18 million units, so earnings growth from this is also achievable.
Further, General Motors focuses on four brands instead of eight, making marketing efforts more concentrated and efficient.
Cost savings
The firm set up a voluntary employees' beneficiary association (VEBA) for the retiree health-care costs of the United Auto Workers. Savings due to this implementation are around $3 billion a year. Moreover, plant closings have lowered costs as well.
Pricing
General Motors developed a new and better pricing model searching for profitability. For example, the new Cadillac CTS sells for as much as $8,000 more than the previous model. The company is operating in what is known as a demand-pull model where it produces only to meet demand.
Payment history
In 2008, the firm suspended its dividend before eventually going through a bankruptcy reorganization. In 2014, it reinstated the dividends payment for 30 cents per share, showing its commitment to return cash to investors. The current dividend yield is 3.3% which is good to protect investors' purchasing power.
Revenues, margins and profitability
Looking at profitability, although the revenue growth was 23.5%, earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($0.11 vs $0.75). During the past fiscal year, it reported lower earnings of $2.35 versus $2.93 in the prior year. This year, Wall Street expects an improvement in earnings ($2.71 versus $2.35).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| GM | General Motors Co. | 12.55 |
| F | Ford Motor Co. | 27.12 |
| TM | Toyota | 12.6 |
| HMC | Honda Motor Co. | 9.7 |
| Â | Industry Median | 10.07 |
The company has a current ROE of 12.55% which is higher than the one exhibited by Honda Motor Co. (HMC, Financial) and the industry median. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking at higher levels of ROE, Ford Motor Co. (F, Financial) has a much higher ratio. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 136.2x, trading at a premium compared to an average of 18.1x for the industry. To use another metric, its price-to-book ratio of 1.4x indicates a discount versus the industry average of 1.62x while the price-to-sales ratio of 0.4x is below the industry average of 0.69x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
U.S. automakers reported another strong month for July so the outlook is promising. The Detroit-based company is a leader in the automaker world in terms of sales and production after the loss in reputation due to the bankruptcy issues.
Moreover, the stock's relative valuation and the return on equity that exceeds the industry average make me feel bullish on this stock.
Lastly, the management now is strong. Mary Barra is the fourth CEO since the company emerged from old GM's bankruptcy, but the first who may stay for a long period.
Hedge fund gurus like Jeff Auxier (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Robert Olstein (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
