Should This Auto Stock be on Your Watch List Now?

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With shares of General Motors (NYSE:GM) trading around $25.79, is GM a Buy, a Wait and See, or a Stay Away? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s MovementGeneral Motors

GM posted third-quarter financial results on October 31 that came out ahead of analyst estimates. Revenue rose 2.4 percent to $37.6 billion from the year-earlier quarter. Net income attributable to common stockholders fell to $1.5 billion ($0.89 per share) versus $1.7 billion ($1.03 per share) a year ago.

The company released October U.S. sales numbers on November 1, reporting its best October since 2007. Deliveries were up 5 percent to 195,764 units compared to a year ago. Year-over-year retail customers were up 7 percent, but sales to fleet customers were down 2 percent. Chevrolet dealers sold a record 2,961 Volts.

E = Debt to Equity Ratio is Close to Zero

GM’s debt-to-equity ratio of 0.36 looks pretty spiffy when compared to competitors like Ford (NYSE:F), which has a debt-to-equity ratio of 5.86, and Toyota (NYSE:TM), which has a debt-to-equity ratio of 1.12.

It’s also good to look at total debt and total cash on hand, which for GM is $14.79 billion in debt, and $32.61 billion in cash. Ford has $99.9 billion in total debt, and $23.79 billion in cash, while Toyota has $149.01 billion in total debt, and $38.86 billion in cash.

T = Technicals on the Stock Chart are Strong

As of November 1, 2012, the stock price is 4.29 percent below its 20-day simple moving average, or SMA; 0.27 percent below its 50-day SMA; and 0.94 percent above its 200-day SMA.

Since the beginning of 2012, the stock price has been in an upwards trend, gaining 21.85 percent this year to date, and 9.94 percent year over year. However, the stock price is down just shy of 25 percent over the past two years.

E = Earnings Are Increasing Quarter over Quarter

Keep in mind that GM’s IPO was in November, 2010. After 2008, GM’s yearly revenue has been on a consistently upward trek.

Fiscal Year 2007 2008 2009 2010 2011
Revenue ($) in millions 179,984 148,979 104,589 135,592 150,276

(Fiscal year is January-December.)

The company has been struggling to grow revenue on a quarterly basis against a global economic downturn and evaporating demand – particularly in Europe, where GM has forecast it could lose as much as $1.5 billion in 2012.

Quarter Sept. 30, 2011 Dec. 31 2011 Mar. 31, 2012 June 30, 2012 Sept. 30, 2012
Revenue ($) in millions 39,373 36,719 37,990 37,759 37,600
Diluted EPS ($) 1.03 0.25 0.59 0.89 0.89

 

E = Excellent Relative Performance to Peers

Many investors favor return on equity as a key metric to diagnose how well a company is operating. GM’s performance falls between competitors with an ROE of 5.52 percent, compared to Toyota’s ROE of 5.52 percent, and Ford with an ROE 158.42 percent.

Operating margins are also critical for stock evaluation. GM has a low operating margin of 3.39 percent, compared to Toyota at 3.96 percent, and Ford at 4.61 percent.

T = Trends Support the Industry in which the Company Operates

Like most companies, car manufacturers have been fighting against a dismal global economic situation ever since the crisis. The auto industry in particular has been hard hit in places like Europe, where major manufacturers are losing as much as $1.5 billion per year. Demand has crashed 20 percent or more, and major restructuring will be necessary before there is any recovery in the European market. In the most recent quarter, sales were bolstered by fairly strong North American numbers, but the market in the U.S. faces its own difficulties.

However, the consensus seems to be that the auto industry will recover. Manufacturers will be leaner and smarter than they were before the boom. GM is entering a new rhythm as a publicly traded company and investors are eager for it to succeed. A major benchmark will be when the government sells its remaining stake in the company.

C = Conclusion

That being said, GM is not expected to have a great next quarter. Analyst estimates for fourth-quarter earnings per share are coming in at $0.68, reflecting ongoing struggles to spur revenue growth. Full-year earnings per share are estimated at $3.12 for 2012, and there’s not a lot of faith heading into 2013 with a full-year outlook of $3.86 per share.

In some ways, GM has taken the high road with its product line up by pushing the development of the Chevrolet Volt. By pretty much any measure, the electric vehicle was a bold move. Critics have come out against the car and pointed at losses that GM has incurred with its production. But the fact remains that the Volt is the best-selling EV in the market right now, and October was a record month.

Because of this, and the metrics above, GM is a Wait and See. We’ll have to look at the company’s fourth quarter numbers and the 2013 situation before we can confidently expect solid growth out of the company.

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