General motors company (NYSE Ticker:GM) to beat its first-quarter profit expectations. So far, however, the market is not impressed. The GM stock is moving slightly down in trade on Thursday. Despite beating profit expectations and blowing out income ($1.43 vs. 1.27 $consensus), GM has not received a boost.
In fact, the stock was returned to the Lower end of its 52-week trading range. Despite trading on a trailing 7x, 6x forward profit and offers a healthy 4% dividend yield. So why are investors nabasa GM stock?
While GM beat on key indicators, it was a quarter, which are difficult to compare with the previous one. This is because the company was engaged changed their production line. The transition to convert more factories to the production of trucks decreased revenues in the quarter.
In addition, the sale of assets in Europe has also reduced the company’s revenues for the year-over-year. Even with the replenishment of the income of more than one billion dollars, the company’s revenues fell more than 12% per year/over/year, or 3% After adjusting for the exit from the business.
And despite beating EPS for the quarter against expectations, the net profit fell more than 50%. This is mainly due to the $900 million write-down on its South Korean business. While domestic GM showed strong results in recent years, international disagreements have led to one headache after another.
Car company to generate cash flow also decreased.
That said, GM stock bulls can find a lot of both. The company showed profitability in all operating segments. Domestic car sales were a strong point, a rise of 4% for the quarter.
In addition, the CFO noted that the company experienced record levels in China, and GM financial departments, paving the way for the company to pre-set hit its annual forecast. Overall, a pretty good quarter for “General motors”. But with all the moving parts, it is not surprising that the market has an understated reaction.
GM continues to strengthen its competitive position
Salvage in South Korea is part of a disturbing trend. The company takes its lumps as it rolls back a large part of their bloated Empire. However, this pain will lead to much stronger results for GM stock for a long time.
Enormous companies many years ago, too many brands, the scatter shot marketing, and a lot of foreign entities have led to an unacceptably high cost.
On top of streamlining operations, “General motors” received serious concessions from the unions in relation to health care costs for retirees, saving billions. In conjunction with the North American division, which went from disaster 10 years ago on MVP now, and the “GM” looks set to compete.
Even recognizing that auto up-cycle is nearing an end, with a substantial slowdown in sales, most likely, the GM should still be able to make a profit. Compact, more focused GM’s operations are much more willing to stand his ground against the likes of Toyota Motor Corp. (ADR) (NYSE Ticker:TM) and Honda motor co Ltd (ADR) (Ticker NYSE:HMC).
In fact, David Whiston from morningstar estimates that GM can now break even at 18-19% market share in North America, even if the total volume of car sales in the United States to retreat to 11 million vehicles/year. This is a huge margin of safety against the current 17 million vehicles sales run rate.
However, GM is not as cheap as it looks
GM stock looks like a screaming buy some normal profits. However, as I explained in more detail in a recent article about Ford motor company (Ticker NYSE:F), SP is a deceptive metric for the automotive industry. These operators usually have tons of debt and outstanding liabilities, which makes the real rating is much higher than the PE ratio would imply.
In addition, these companies rely on their financial divisions to cover a significant portion of their profits. As chief financial officer Chuck Stevens said It was a record quarter for GM financial. That means the company makes more than ever borrowed money against the car.
It is perceived as a more risky business than the actual production car, and as we can see, there are some signs of distress begin to appear on the car market.
Simply put, the market will not pay as high a PE ratio for the company where he makes a lot of money for potentially risky loans. Combine this with worries about debt, Union contracts, legacy pension obligations, and so forth, and it is not surprising that the market will not pay that high PE ratio for GE stock.
GE stock verdict
That aside, it’s not hard to make the case that the market is too negative here. Even at a modest PE ratio of 9x profit next year, GM’s shares will cost 50% more than selling for today. The company was lumpy quarter this time, but the results were good and confirmed that they are on pace to hit the leadership of 2018.
Most importantly for yield-seeking investors, GM’s stock again after 4%. You don’t understand that now many large American industrial firms. In conjunction with the stock repurchase, GM will return this year to almost 10% of capitalization for shareholders.
Well-known investor David Einhorn of Greenlight capital summed it up well in his latest quarterly letter:
“Fundamentals of GM to be favorable. Employment is strong, tax cuts are not helping customers, the GM, used car values are not effective against expectations and rates of utilization in industry is increasing.
“UM optimization of inventory and a product line that is gaining share pricing. We just don’t see what the market may say, and we believe GM has more chances to beat near and medium-term forecasts than to disappoint.”
While the market may be proven right in its skepticism, the statement of profit reinforces the assertion that the General engine stock needs to move forward in the coming months.
At the time of this writing, the Author held no positions in any of the above securities. You can contact him on Twitter @irbezek.