General Motors May Offer an Incredible Opportunity
publication date: Jul 26, 2017
author/source: Brian Nelson, CFA
We continue to believe GM’s valuation and dividend profile may be too good to pass up. At the very least, it should receive a multiple on current-year earnings like that of the airlines, another cyclical boom-or-bust industry that has traditionally been associated with bankruptcy.
By Brian Nelson, CFA
On July 25, General Motors (GM) showed why we include shares in both the Dividend Growth Newsletter portfolio and Best Ideas Newsletter portfolio when it reported strong second-quarter results. There are three things that you must know about GM’s stock. One, GM’s annual dividend of $1.52 per share means the corporate is yielding ~4.2% at present levels, or roughly double that of the average S&P 500 company. For a corporate, this level of yield is quite noteworthy, as such lofty payouts are generally more common with master limited partnerships or real estate investment trusts. Dividend coverage at GM is good, too. Adjusted automotive free cash flow from continuing operations of $2 billion during the first six months of 2017 (up 19.6% year-over year) compares to $1.145 billion in cash dividends paid over the same time.
Two, General Motors is targeting 2017 non-GAAP earnings per share in the range of $6.00 to $6.50, implying the company is trading at just 5.5 times current-year earnings numbers, a huge anomaly in a stock market that is assigning double-digit multiples to consumer discretionary companies with far less appeal as General Motors. Its second-quarter report revealed that it even may be pacing ahead of the full-year guidance range with EPS-diluted-adjusted coming in at $3.64 through the six months ended June 30. The multiple is downright puzzling as GM holds cash and marketable securities of ~$20.5 billion against total automotive debt (short and long-term) of ~$11 billion.
Third, General Motors is generating significant economic value for shareholders. In the four quarters ended June 30, the auto maker has generated a ROIC-adjusted measure north of 30%, far in excess of any measure of its cost of capital. Though performance will always be cyclical, it’s simply hard to fathom that the stock market today is unwilling to pay more than 5-6 times non-GAAP earnings for a company generating such a high ROIC. We conservatively value shares of GM at $42 each, but the high end of the range ($55) may be more appropriate, particularly in light of its automotive net cash-rich balance sheet.
The market may simply be misallocating capital to significantly overpriced Tesla (TSLA) or be unable to accept such an opportunity given what may be a lasting stigma associated with GM’s well-publicized bankruptcy during the Financial Crisis. We don’t think the mispricing will last forever, and we point to the recent performance of airline equities, American Airlines (AAL) and United Continental (UAL), as two entities that filed for bankruptcy only to come out stronger during this part of the cycle. American is trading at 9.7 times 2017 consensus earnings, while United is trading at 8.9 times 2017 consensus earnings. At ~9 times current year non-GAAP earnings, GM would be a $55-$60 stock. It currently trades for ~$35.