The New GM Is an Excellent Long Term Buy Idea

By Robert Fisher - January 23, 2012 | Tickers: F, GM, TM | 0 Comments

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The government bailout of General Motors (NYSE: GM) will continue to fuel debate about government entanglement with business for years to come. It will be a long time before the “Government Motors” moniker is forgotten by people, but General Motors warrants serious consideration as an investment going forward.

GM Regains Sales Leadership

Perhaps the most encouraging news coming out of this Detroit automaker is that it is once again the top-selling automaker in the world. It remains unclear what would have happened had the earthquake and resulting tsunami had never hit Japan and disrupted Toyota (NYSE: TM), but the top sales position is important for GM. The price-to-sales ratio for the previous twelve months of only .26 is very attractive, considering competitors TM is .48 and Ford (NYSE: F) is .36. However, GM profitability is less than half its closest sales competitor, Volkswagen (VLKAY), bringing in about $17B versus GM’s $7.4B in sales.

Despite this criticism, GM is rated as a buy by most analysts and GM is also the leader in developing China.  Even though GM’s operating margin for the trailing twelve months is only 3.92% versus cross-town competitor Ford’s 6.25%, if GM can sell more units worldwide, it will still offer sufficient profitability to make it an attractive investment. There are those that will argue that F is a better investment because it did not take a bailout and has been better operated all around. But these positive aspects are not enough to justify foregoing the value that there is in GM. GM sells at a deeper discount to future earnings with a PEG of .45 versus F’s .69. TM, for all of its problems, remains an expensive stock selling at a premium to future earnings with a PEG of 1.19. While TM will probably build its 25 millionth car in North America this year, it will continue to be a difficult comeback for this automaker. 

The Volt Is Okay

Perhaps the most revolutionary product of GM, the Chevy Volt, came under investigation late last year for possible defects with the battery that would cause it to catch fire when involved in an accident. Luckily for GM, the government closed its investigation, and concluded that there is no increased risk of fire in the Volt versus gasoline-powered cars. This is especially important since the Volt enjoys very high customer satisfaction, beating the sporty Dodge Challenger and Porsche 911. 

Apparently, the Volt has been a marketing tool to get new customers into GM dealers' doors, as people come to see the Volt but purchase the more affordable Cruz. While every auto maker is developing its own electric car, Volt has had the advantage by being the first on the market and offering the dual fuel option, which allows for longer trips than Nissan’s (NSANY) Leaf, which has a limited range.

GM is Cheap

Many investors are a lot more interested in F than they are in GM. However, GM is cheap -- it sells at a price-to-book value of 1.13, which is much more attractive than F’s 8.01. Despite having a smaller market capitalization relative to F, GM gets about $1B more in net income, despite thinner operating margins versus F.  GM also compares favorably on enterprise value to revenue ratio, coming in a .12 versus F’s .91. F does compare favorably to GM, featuring a return on assets of 3.09 versus GM’s 2.56. However, this difference is not enough to justify overpaying for F over GM.

Dividend investors may legitimately prefer F over GM, as the former pays a 1.6% dividend yield, whereas the latter has not paid dividends since its IPO in 2010. Similarly, TM pay a dividend yield of 1.4%. However, if the Japanese automaker continues to have production difficulties that will inevitably impair revenues and profits, they may consider reducing or eliminating the payment to investors.

The Automobile Market Is Improving for Everyone

While the economy is far from being well, the auto sales numbers are much healthier than the real estate the cars are parked on. While the housing market remains weak, sales in just about every segment of the auto market has shown growth (with the exception of large cars). Of course, this is good for GM and all of its competitors, but it may be especially good for GM if it can manage to retain its top spot in the sales category.

GM may very well be able to hold on: of the top 20 vehicles in terms of sales, GM lays claim to four (Chevy Silverado, GMC Sierra, Chevy Cruz and Equinox). This is not to say that TM cannot regain the sales crown in the future, especially as they rebuild existing plants and open new plants. However, the overall increase in the improving auto market is an encouraging for a large-auto maker such as GM.

Bottom Line

GM is often maligned for being bailed out by Uncle Sam, however, there is considerable value to be had for investors going forward. As many rightly laud Ford for not turning to the government during lean economic times, this should not be an excuse to overlook the merits of the newly constituted GM. TM has considerable struggles to work through before investors take an increasing position in this stock. 

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