Does GM’s Stock Have More Upside?

by Trefis Team
General Motors
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At the current price of around $60 per share, we believe General Motors’ stock (NYSE: GM) has moderate growth potential in the near term. GM stock has risen by 78% since the end of 2018 compared to the S&P500 which has increased by 57% in the same period. In 2021 we expect revenue to recover marginally while earnings are expected to recover after a fall in 2020 with the impact of Covid-19. Earnings were also impacted by a one-time tax expense due to changes in valuation allowance, an increase in pre-tax income, and the absence of U.S. tax benefits from foreign activity. Over the recent years, the company has seen earnings fall while its P/E multiple has increased. Our dashboard ‘Buy or Sell GM Stock?‘ provides the key numbers behind our thinking.

GM’s revenue fell from $147 billion in 2018 to $123 billion in 2020 (includes equity income from China). Net income margin fell from 5.4% in 2018 to 5.1% in 2020. On a per share basis, earnings went down from $5.61 to $4.36 offset by a 1.6% increase in shares outstanding.

During the same period, the P/E multiple jumped from 6x to around 9.5x. The P/E improved slightly in 2021 and is currently around 13.7x.

Where Is The Stock Headed?

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This, in turn, adversely affected consumption and consumer spending. The automobile sector was one of the worst affected and GM was no exception as it saw its revenues and earnings fall in the first half of 2020. There was some recovery seen in the second half of 2020. GM saw revenue fall by 11% to $123 billion (includes equity income from China) for 2020.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. In 2021 we expect GM revenues to rise to $124.1 billion. Further, its net income is likely to rise to $7.8 billion, increasing its EPS figure to $5.45, which coupled with the P/E multiple of 12.4x will lead to GM’s valuation around $68 per share, up by 13% from the current market price.

While GM may have further upside, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Amazon vs Etsy. Another example is Apple vs Microsoft.

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