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General Motors is back on track

Improving fundamentals make GM a good purchase for income and value investors.

Catherine Multon 14 July, 2015 | 5:00PM
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Once seemingly destined for the stock market's scrapyard until being rescued by massive government bailouts in both the United States and Canada,  General Motors Co. (GM) is back on track. Improving fundamental attributes merit a Buy recommendation on GM for some investors, according to Morningstar’s CPMS screens.

One significant attractive metric is GM’s expected dividend yield versus its industry median. GM’s expected 4.5% dividend yield is 380 basis points greater than its peers in the consumer-discretionary sector, which should attract the attention of income seekers.

At the same time, GM's improving fundamentals mark it a Buy for value investors. A strong contributor to this Buy ranking is GM’s price-to-earnings ratio based on trailing EPS, which at 8.8 times ranks among the best in the Morningstar CPMS U.S. stock universe. Two other good value indicators for the company are its price-to-earnings ratio based on analysts’ forward EPS estimate, which is 7.1, and its price-to-cash-flow ratio of 5.4.

GM currently rates a Sell in the Morningstar CPMS growth and momentum-oriented strategies. In these strategies, a stock must have a positive earnings surprise to be rated a Buy. When GM last reported its quarterly earnings on April 23, it disappointed the market with a negative earnings surprise of -3.7%. Otherwise GM would have been rated a Buy; it is one good earnings report away. (GM is next due to report its earnings on July 23).

Even so, GM achieved quarterly earnings momentum of 18.8% and quarterly EPS momentum based on next quarter’s consensus estimate of 14.6%. Meanwhile, return on equity based on analysts’ forward EPS estimate is strong at 20.1%. With this earnings strength, if GM were to post a positive earnings surprise, it would have a good chance of qualifying as a Buy in momentum and growth-oriented strategies as well.

Even though GM's earnings momentum is a healthy 18.8%, quarterly sales momentum is -1%. In other words, earnings have risen nicely while sales have declined slightly. This suggests GM is cutting costs and operating much more efficiently than in the same quarter last year.

As noted by Morningstar analyst David Whiston, GM has streamlined costs by marketing only four brands, down from eight in previous years. As well, savings on health-care costs for retirees and select plant closures have further reduced costs. This helps explain why first-quarter earnings have increased while sales have remained stagnant.

Sales have picked up during the second quarter. In May, they rose 3% from the same month a year earlier, led primarily by GM light-truck models. GM is benefiting from increased demand for pick-up trucks, driven in part by fuel prices having fallen by about 25% from a year earlier.

If this recent uptick in sales can help generate a positive second-quarter earnings surprise, GM stock will appeal to growth and momentum-oriented investors in addition to its current attractiveness for those looking for value and/or a healthy dividend yield.

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About Author

Catherine Multon

Catherine Multon  Catherine Multon is a contributing writer for Morningstar Canada.

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