Is GM Stock Overvalued At $55?

[Updated 01/27/2021] General Motors Update

Having grown 45% since the end of 2019, General Motors stock (NYSE: GM) is at its near term potential. GM’s stock grew from $37 at the end of 2019 to near $55 now, compared to the S&P 500 which gained 19% since the end of 2019. The company has seen revenue falling over recent years, while its P/E multiple has risen. Our dashboard Buy or Sell General Motors Stock has the underlying numbers.

Due to the Covid-19 crisis, GM saw its revenue fall by 20% in the first 3 quarters of 2020 as lockdowns drastically affected discretionary spending. In Q3 2020, GM beat consensus estimates for revenue at $35.5 billion, flat y-o-y, and earnings recorded at $2.80 compared to $1.62 in the same period of the previous year. Further, the company reported $10 billion of cash inflows from operating activities for the first nine months.

We expect General Motors’ revenues to fall by 11% to $122.5 billion for 2020. Further, its net income is likely to fall to $5 billion, decreasing its EPS figure to $3.50 in 2020. Thereafter, revenues are expected to fall slightly further to $121.4 billion in 2021, while the EPS figure will likely improve to $4.14, which coupled with the P/E multiple of around 13.3x will lead to General Motors’ valuation around $55, which is in line with the current market price.

[Updated 11/11/2020] General Motors Stock Has A 15% Upside After Positive Q3 Results?

After a 6% rise this year, at the current price near $40 per share, we believe General Motors stock (NYSE: GM) has a moderate upside in the near term. GM stock has increased from $36 to $38 since the start of the year compared to the S&P 500 which increased almost 10% in 2020. The stock has underperformed the market primarily due to a huge fall in sales volume in Q2 2020 across the world. For Q3 2020 revenue was flat at $35.5 billion while earnings improved to $2.80 compared to $1.62 in the same period of the previous year. Revenue and earnings were driven by a 10% growth in sales volume across Asia/Pacific, Middle East and Africa regions. We expect revenue and volume recovery to continue in Q4 2020 and the stock price to rise along with it.

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General Motors’ revenue fell 6.7% from $147 billion in 2018 to $137.2 billion in 2019. Margins also fell from 5.4% to 4.9% during this period. On a per share basis, earnings went down from $5.61 to $4.62.

During the same period, the P/E multiple increased from 6x to 7.9x. The P/E improved in recent weeks as the company and sector are showing signs of recovery. Currently the multiple stands at 8.4x.

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 is likely to adversely affect consumption and consumer spending. General Motors’ revenues and earnings took a hit for the first half of 2020, but in Q3 reported flat revenue and a growth in earnings compared to the same period in 2019. Q3 2020 also saw sales volume recover compared to Q2 2020 where we saw a huge decline due to lockdowns affected across regions. Asia/Pacific, Middle East and Africa region saw a 10% y-o-y hike in volume while vehicle sales in North America were down by 11% y-o-y.

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. With investors focusing their attention on 2021 results, the valuations become important in finding value.

While GM stock may have risen, 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 General Motors vs Comcast.

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