Is General Motors a Risky Investment?

With shares of General Motors (NYSE:GM) trading at around $27.82, is GM an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

As the Great Recession moved into the picture, car buyers moved out of the picture. This was despite the fact that there were many old cars on the road. The average consumer drives their car for 11.2 years. During late 2008 and early to mid-2009, many cars on the road had been driven for more than 11.2 years. However, economic conditions didn’t allow for many new car purchases. As the economy improved, or more importantly, as interest rates declined, pent-up demand began to lead to new car purchases. Currently, General Motors is enjoying decent margins and revenue increases, but is this sustainable?

The restructuring process for General Motors was considerably longer than the restructuring process for Ford Motor Co. (NYSE:F). This led to General Motors being behind on new model launches. However, that trend has changed. General Motors is now the leader in this area, which will mean more showroom visits. This, in turn, has the potential to lead to increased sales. North American sales are expected to see continued growth. This growth should more than compensate for a dismal situation in Europe. Restructuring in Europe should help minimize losses in Europe, but it won’t prevent losses.

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The chart below compares fundamentals for General Motors, Ford, and Toyota Motor Corporation (NYSE:TM). These three companies differ in size. Toyota is a much larger company, but this article will focus more on U.S. automakers. General Motors has a market cap of $38.01 billion, Ford has a market cap of $51.58 billion, and Toyota has a market cap of $162.52 billion.

GM

F

TM

Trailing   P/E

9.53

9.24

16.63

Forward   P/E

6.38

7.74

13.35

Profit   Margin

4.06%

4.22%

3.51%

ROE

16.15%

36.10%

7.94%

Operating   Cash Flow

$10.60 Billion

$9.04 Billion

$30.85 Billion

Dividend   Yield

N/A

3.00%

1.30%

Short   Position

7.30%

N/A

N/A

 

It should be noted that only Ford has positive levered free cash flow, which is $12.25 million. Levered free cash flow for General Motors is -$11.16 billion. Levered free cash flow for Toyota is -$8.00 billion. Let’s take a look at some more important numbers prior to forming an opinion on General Motors.

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