Bullish on General Motors Through 2017

Attractive valuations will drive stock upside, and new models will help sustain growth

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Jan 11, 2017
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For the year 2017, General Motors (GM, Financial) is among the top picks on my investment list, and current levels are appealing for medium to long-term exposure to the stock.

In the last year, General Motors has delivered 23% returns, and it would not be surprising if the stock returns are better in the next 12 months.

I want to start my discussion with the company’s forward valuation with General Motors providing renewed guidance in its Jan. 10, 2016 presentation. GM expects to report EPS of $6.0 to $6.5 per share for 2017. Considering midrange of the guidance at $6.25 per share, GM is currently trading at fiscal 2017E price-earnings (P/E) of 5.9. These are appealing valuations for a company that is also paying a healthy dividend of $1.5 per share (current dividend yield of 4.2%). Besides potential stock upside and healthy dividends, GM will also create value for shareholders through 2017 in the form of share repurchases. These factors do make the stock appealing, and the discussion below on the business growth will further back my thesis.

Among various growth factors for GM, I want to start with China, and it is worth noting that auto sales for China surged by 17% for December 2016. Further, retail auto sales for 2016 in China was 23.9 million units, representing growth of 15.9% on a year-on-year basis. Strong retail auto sales came at a time when Chinese economic growth was sluggish and there are early signs of recovery in the economy. Therefore, it would not be surprising to see better sales volumes in 2017, and this is good news for General Motors.

For General Motors, the joint venture in China delivered per unit revenue of 73,600 yuan ($10,624.9) in 2013, and this is expected to increase to 78,000 yuan in 2016. With better sales mix, I expect GM to continue doing well in China and as the market expands, I expect bigger investments in the Asian region.

I must add here that even on a global scale, General Motors has moved toward a richer mix of offerings as indicated by an increase in revenue per wholesale unit sale in fiscal 2016 to $26,700 from $23,800 in fiscal year 2013. This trend is likely to sustain and will have a meaningful impact on EBITDA margin and operating cash flows in the coming years.

In the global markets, the company’s trucks, SUVs and crossovers have found greater acceptance, and General Motors is targeting product launch in 2018 that will be in sync with global demand. I therefore expect increasing revenue share from outside the U.S. in the coming years. This is critical as emerging Asia will drive revenue growth for long-term.

From a capital investment perspective, GM will be deploying $9 billion in 2017 for capital expenditure and that does not impact the company’s balance sheet considering the point that GM expects $15 billion in operating cash flow for fiscal 2017. Aggressive investment target, coupled with the fact that GM is also working toward $1.0 billion in cost reduction, is another key positive factor that will take the stock higher.

Speaking of new model introductions and refreshed models, it is worth noting that for fiscal 2016, 34% of the company’s revenue was from new or refreshed model introduction. With aggressive investments, I expect new models to remain a key growth driver in 2017 and beyond.

General Motors is working toward models that gain quick traction in markets and the company’s cost cutting along with aggressive investments is likely to translate into sustained EPS upside. The stock still trades at attractive valuations and can be considered for investment even at current levels.

Disclosure: No positions in the stock.

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