What’s Good For GM Is Deemed Good For Your Portfolio – Forbes
It used to be said in Washington and Wall Street that “What’s good for General Motors is good for America.” Well, now some analysts argue that what’s good for GM is good for your investment portfolio.
So activist investor David Einhorn might contend that GM and its shareholders would be better off if America’s largest auto maker were to create two classes of shares – one for dividends and the other for capital appreciation. But GM’s board of directors rejects the idea, claiming it would create risks and confusion for GM shareholders. But one thing is clear: Both Einhorn of Greenlight Capital and GM’s board agree the stock is undervalued.
In other words, GM’s shares are attractive, so what’s the problem? Einhorn believes management isn’t doing enough to boost the stock price and that his plan would fire up the stock. But the bulls believe the stock is just fine — and attractive as it is.
Efraim Levy, equity analyst at CFRA Research, specifies the reasons why he thinks GM, trading at $33 a share with a hefty dividend yield of 4.2%, offers a 21% total-return potential relative to his 12-month price target of $42 a share.
“While we see lower U.S. volume and unfavorable currency exchange rates, we see benefits from an increased proportion of higher-profit truck and SUV sales,” says Levy, and “we view GM’s focus on profits over size, as exemplified by the planned sale of its European operations, Opel/Vauxhall, as the right approach.” Levy also sees material cash generation supportive of investment and EPS accretive share buybacks.
“We find GM attractively valued at 5.7 times our 2017 EPS estimate,” says Levy, who points out that his target multiple for the stock of 7 times his 2017 EPS estimate of $6.30 is based on historical and peer price/earnings ratio analysis.
The analyst agrees with GM’s board that the proposal of Einhorn would add “unneeded complication and confusion for shareholders,” and offers little value-add to GM’s operational performance. He also disagrees with Einhorn’s claim that GM trades at a discounted valuation. There would be investors who would focus only on a dividend stock, concedes Levy, but “there would be less interest and likely less value in a capital-appreciation-only stock for this cyclical company.
There would be “less interest in GM if separated into two classes of shares than as it is constituted today,” asserts Levy.
So what’s holding back GM’s stock? Cyclical concerns, says Levy, are what are setting back GM and the other auto manufacturers. With forecasts by some analysts that U.S. sales volume has peaked, investors are afraid that when recession hits, demand would inevitably plunge. But Levy maintains that the manufacturers are right in claiming that this time, things are different.
“Getting rid of ten of billions of dollars of debt and closing excess manufacturing plant capacity via bankruptcy goes a long way to helping substantial profitability,” argues Levy. However, he believes that unless GM and other automakers prove themselves by coming through a recession, or cyclical sales trough, “we think the companies will have tainted valuations.”
But Levy believes the discussion itself on Einhorn’s proposal “is a potential catalyst for the realization of a higher valuation for GM.”
In the meantime, Levy suggests investors “should enjoy the 4.2% dividend yield while waiting for GM’s higher potential value to be recognized.” Shares of GM have dropped from its 52-week high of $38 to $34, but Levy predicts the stock will advance to his target of $42 within a year. So he rates the stock of GM, the largest’s maker of cars and trucks in the U.S. and one of the largest globally, as a “strong buy.”