I like General Motors (GM). The company reported strong earnings this week, beating estimates handily with net income of $2.9 billion in the second quarter (before interest and taxes), up from $1.4 billion a year earlier. That was a gain of more than 100% over the prior year. Strong North American truck sales and strong sport utility vehicle sales in China were behind the impressive performance.
While it's true that revenues slid slightly (3.7%), the company's focus was on improving profit margins and that's exactly what it did. With respect to China, GM's outlook looks very promising. Even in the midst of China's economic slowdown, demand for its vehicles remains strong.
GM's stock is trading at a 12.7 price-to-earnings multiple. It pays a nice dividend of $1.44 per share, which equates to nearly a 5% dividend yield, which is very rich in today's low-yield environment. The company is expanding its range of automobiles and penetrating into broader market sectors. Personally, I like the new Corvette, which is a mind-bogglingly affordable supercar that can compete with Ferrari and Lamborghini and Porsche. (I like high-performance cars!)
GM stock has been stuck in a trading range for the past two years and at about $31 per share, it is near the lower end of that range. It looks like a buy at this level. The stock's lack of performance has been mostly related to recall issues and lawsuits. To be bullish on GM means you have to assume that the company will work through these problems. We are starting to see that. Most of the faulty ignition switch repairs will be completed by the end of this year and a federal judge has scheduled a trial for early 2016 that will determine the outcome of hundreds of wrongful injury and death lawsuits that have been filed. In the meantime, management has already set aside a compensation fund to deal with these claims.
GM will go on making money. On a value basis, the stock is a terrific value. Compared to other automakers, such as Ford (F), you see that Ford is trading at just under a 19 PE with earnings of $0.78 per share and a dividend yield of about 4%. Ford does not have the China presence that General Motors has.
Toyota (TM) is trading at a PE of 12 and has a dividend yield of 3%. However, the stock is selling for about $133 per share and that may be a bit too (nominally) pricey for most investors.
Honda (HMC) is just under a 14 PR with a 2.2% dividend yield. The stock is trading around $31 per share. GM is clearly a better value if you discount the legal issues.
Nissan (NSANY) at $20 per share is interesting. The stock has a PE ratio of 11.3 with positive earnings, but no dividend. I like dividend-paying stocks. I've written a lot here about how dividends are becoming an increasingly important part of personal income. That trend is going to continue and that's why I always recommended investing in dividend stocks so Nissan is off my list for now.
So that's my take on GM. The stock is a buy at the lower end of the trading range. It can be accumulated there, but probably not expected to make a big move higher until sometime next year. Patience is the key, but long-term investors will be rewarded.