Why General Motors is a good buy at current levels

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Mar 24, 2015
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General Motors (GM, Financial) has seen a lot of positive analysts commentary after announcing $5 billion share repurchase program earlier this month. Citigroup’s analyst Itay Michaeli believes that the stock has more catalysts going forward. In his latest report, he commented,

We maintain conviction in our “It’s GM in 2015 thesis” and continue to expect General Motors to trade at a premium to peers by year-end 2015. We expect the shares to respond well to this news. The next catalyst after this, in our view, will come from greater appreciation of (1) General Motors’ robust 2016 North America product cycle coming off easier car profitability comps; (2) General Motors’ innovation lead and hidden value within the OnStar/LTE franchise; (3) Less Yen exposure vs. Ford Motor (F); (4) Long-term opportunity at General Motors Financial per today’s 2018 target unveiling. Reiterate Buy/$49 target.

Its not only sell side which is getting bullish on GM off-late. General Motors'Ă‚ stock is also seeing significant interest from fund managers off late. Last quarter, two of the Wall Street's savviest investors, Warren Buffett (Trades, Portfolio) and George Soros (Trades, Portfolio) increased their stake in the company. Warren Buffett (Trades, Portfolio) now holds 41 million shares of the company while George Soros (Trades, Portfolio) holds ~3.86 million shares and more than 1 million call options. Other notable investors who bought shares of the company last quarter includes Ken Heebner (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and T Boone Pickens (Trades, Portfolio).

The company's business is improving, and it has now been profitable for 20 consecutive quarters. Last quarter, GM's business delivered strong core operating performance with almost all key operating metrics including global deliveries, net income and adjusted EBIT improving. The company's adjusted EBIT was $2.4 billion for the fourth quarter, a $500 million improvement over the prior year. Adjusted EBIT margin was 6.10%, up 140 basis points from the fourth quarter of 2013. Net income to common shareholders was $1.1 billion, up $200 million compared to prior year period and earnings per share improved to $0.66 versus $0.57 of prior year.

Geographically, in North America, the company benefited from record average transaction price driven by Cadillac, new Chervolet, GMC truck and SUV. In China, the company's sales continue to outperform the market while in Europe, Opel's strong operating performance helped the company.

The company is expecting even stronger operating performance in FY2015. For FY2015, management is expecting adjusted EBIT and adjusted EBIT margins to improve in all automotive regions. For FY2016, the company's target is to reach 10% adjusted EBIT margins in North America, profitability in Europe and maintaining strong net margins in China.

The company is passing benefit of this strong performance to its shareholders and intend to raise its common stock dividend 20% to $0.36 per share from second quarter of the current year. This is over and above $5 billion in buy-backs announced earlier this month. At current valuations, the announced buy-backs will reduce GM's share count by 8.2%.

General Motors is trading at 8.22 times FY2015 EPS. The company has an attractive dividend yield of 3.20%. Out of 19 analysts covering the company, 11 are positive and have buy recommendations, six have hold ratings and two have sell ratings. The company's improving performance is attracting attention of sell-side analysts and some of the most successful fund managers. I believe General Motors offers a good value at the current levels.