With the recent announcement by Apple (AAPL) that they too are focusing efforts on the autonomous driving game, it seems clear that everyone is looking towards the next winner in the autos. While everyone seems to be looking at Tesla (TSLA), Apple, and Google (GOOGL) to push through on these fronts, let's not forget about the companies that have been in the business for over a century. That being said I am wondering, is it time to buy General Motors Company (GM)?
Price to Earnings Ratio
When we look at GM's P/E Ratio it appears to be well undervalued. Currently sitting at just 5.2 it is ~30% lower than that of companies like Toyota (TM) and Fiat Chrysler (FCAU), and sits at less than half of Ford (F). Not only does GM look good in comparison to their peers but GM itself hasn't seen ratios this low since late-2011/early-2012. This would tend to make one lean towards the opinion that GM is undervalued.
An obvious strength right now for GM is the dividend. Currently the dividend sits at 4.4% yield with a payout ratio of under 25%. This is outstanding when comparing to an average yield of just above 2%. Plus with the payout ratio so low it looks like there could be room to grow the dividend in the near future, which definitely makes it a temptation to purchase.
Dividend yield up, payout ratio down is never a bad thing to see when looking for value stock
One of the most talked about investments that GM has made recently has been the stake it has taken in the ride sharing company Lyft. GM has been working on autonomous driving for years now and have shared their affinity to use the partnership, and the Chevy Bolt, as a self-driving taxi service in 2018.
Add to this the new Maven Gig, launched by GM this past May, that allows drivers of Uber or Lyft to rent a Chevy Bolt for only $229 per week and drive it. All insurance, maintenance, and charges are included in the price. This is yet another proverbial foot in the door for GM and their electric cars as they try to take over ride sharing.
While there has been a recent increase in revenue and also the dividend has been paying out swimmingly to all investors that have decided to partake there is another thing that GM has been piling up: Debt.
Not only has the long term debt been growing lately for GM but the state of their free cash flow (FCF) has been going in the wrong direction. When I see a company trending in the wrong direction, in terms of FCF, I usually get extremely worried about the state of the dividend unless they have a large catalyst that may push them back towards the positive.
Also with interest rates looking to continue their rise this could spell some trouble for the automaker. With or without a raise in rates there is no doubt that I would typically like to see a reverse in trend from the chart presented above.
IT'S All CYCLICAL BABY!
Channeling my inner Dick Vitale for the title to this segment. I always have to remember that when an industry as a whole has P/E values well below the average I need to go to the chart and see if we are nearing (or toppling over) the top of a cycle. When it comes to autos it seems that we may well be.
Looking at the chart to the right it appears that while we may well be sitting at a low point in terms of price-to-earnings it may well be because we actually are at a high point of auto sales. Sometimes it seems that a company may not necessarily be undervalued but instead are at the top of a cycle and be ready to head south. If this is true then GM actually may be headed to a large decline in sales, which could lead to some trouble when considering the aforementioned debt.
I'm sure that it comes to no surprise to anyone that this is a point that I am using against GM. While this company has thrived and survived for decades with different competitors biting at their heels, it seems that this time it may be different.
What GM is facing now is not a competition in automotives but instead a competition in technology. While they no doubt have the ability to create and innovate in this area there is a problem:
They are a car company.
If you think that any car company will be able to make the type of breakthroughs in autonomous driving that tech companies will then you are going to be sorely mistaken. While tech companies can dedicate both substantial time and effort to develop these, GM still has to worry about the bottom line. This means they have to continue to sell cars to drive, not just ones that will drive themselves.
I believe that partnerships will be the key to this and with Ford already partnering with Amazon (AMZN) to put Alexa in their cars they may be a step ahead. Add to this that Ford was also in talks with Google (a fall through that may have led to the firing of former CEO Mark Fields) and GM may be facing the task already behind. No matter what I would like to see a more lucrative partnership from GM than a ride sharing company.
Here we go, 3 ups, 3 downs, now what exactly do I think?
Well for me I think that GM is NOT a buy for me at their current price.
While the dividend yield and the P/E ratio looks appealing they just are not doing enough in terms of innovation for me to take on rising debt at the potential peak of auto sales. I have invested in Ford, since the risk is similar but the dividend is almost a full point higher.
Honestly I just want to see more from GM in terms of a push towards the future. The partnership with Lyft simply adds a potential taxi division to GM that may or may not end in profitable sales of the Bolt. I do like their recent acquisition of Cruise Automation, it may not be enough to put them ahead of a partnership between a rival and the likes of a tech monster.