If General Motors (GM) reports flat earnings for a couple of years, it's a win. That was the thesis yesterday behind the upgrade of the auto company that had been hated by Morgan Stanley for so long. I admitted to being dazed when I saw it. The analyst had been negative for ages on the stock, so it was a begrudging upgrade, for certain. Then when the Street estimates for GM at earnings of $5.85 a share this year, $5.75 next year and $5.57 in 2018, I said, holy cow, that would be a big deal to be flat for the next two years.
No wonder it caused the stock to be one of the biggest gainers.
With the average stock selling at about 18x earnings, it's no wonder that this one sells at 6x, given that it is expected to have two down years in a row. GM's stock has the same problem that Ford (F) has, as well as the issues of three airlines, United Continental (UAL) , American (AAL) and Delta (DAL) : a belief by analysts that the present is going to be much better than the future. F is a holding in the Dividend Stock Advisor portfolio.
That's a pretty darned exclusive club, and it's a real statement for both the autos and the airlines, because there's no particular reason why both industries have to have down years.
The companies are all concerned about the near term, but they are very bullish about the out-years.
The analysts, obviously, not so much.
Who will be right?
I find it hard to believe that both groups will have two down years.
First, I think that a lot of the problems for the airlines have to do with the addition of capacity to take advantage of higher fares. Even after all of the consolidation, the airlines returned to their old coloration this past year -- and have engaged in fare wars all over the place. They simply couldn't resist.
At the same time, foreign travel has become increasingly difficult. First, there's the strong dollar, which has put a real crimp on tourism coming here. Then there's fear of terrorism, which has cut traffic to Europe. Then there's the decline in the economies in Latin America, which has hurt traffic for all of these airlines. Finally there's the unchronicled Zika dropoff. That's a lot of headwinds that are expected to stay headwinds, and I just don't think that this parade of horribles has two years left to it.
All that has to happen for the airlines to turn it around is to pull their most competitive routes, so that margins can expand and revenue per seat mile goes higher. Then they can take all of their cash and buy back stock aggressively, assuring that the additional profit drops to an expanded bottom line. I think that's very doable.
The autos? Tougher. They face real headwinds longer term: driverless cars, Uber as a way of life, younger people no longer getting cars or licenses as soon as possible. These seem to be worldwide concerns.
Short term, though, I think there's some reason for optimism, too. The United States is strong -- and could stay strong with these levels of unemployment and low gasoline prices. Unlike so many of my colleagues, I think that Europe, with 770 million people, isn't going to put up negative numbers this year with these incredibly low interest rates and a central bank that will not stop until some economic activity picks up. Plus the euro is at a 15-year low and immigration explosion could cause even the tight-fisted Germans to spend money. I think betting against Europe out two years seems just ill-advised.
Latin America's tough. But Brazil could be going the way of Argentina, and Venezuela's chaos is unsustainable. Mexico is strong. I think the peso is troughing.
Finally there's China -- and this is where my optimism explodes. GM's doing very well in China. Last year, it sold 3 million cars in the United States. But it sold 3.6 million in China. This will be an even better year, with sales up 8.1% over 2015 so far -- and August was up 18% over the previous year.
GM, like the airlines, needs to take that cash and buy as many shares as it can, and then there will not be a down year ahead.
Now, will this kind of financial engineering "count?" Look at the gains in the packaged goods group -- with no organic growth but lots of bought growth through share shrinkage.
No one cares how you get to higher estimates. They will pay more for them. That's why I think Morgan Stanley will be right, and most of the airlines are buys not sells. I know they are all awful, I just want don't want to rule out that the future must be dimmer than the past.