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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

GM

July 8th 2015

General Motors 
NYSE Symbol: GM
Industry: Auto
Price as of 7/8: $31.19

 

After the first six months of the year the major averages have gone nowhere. The Dow and S&P 500 are in negative territory while the Russell 2000 is up 2% while the Nasdaq Composite is up 3.5%. The Greek loan default is all over the headlines as an exit from the Euro is a real possibility, but the collapse in the Chinese stock market is probably a bigger concern to US investors and to the global growth story. The price of copper, a signal of global expansion, has come under pressure trading at new lows while another leading indicator, the Dow Jones Transportation Average, is in correction territory down 13% from the December highs. If the current trend continues this could be a bumpy rest of the summer and fall season. The good news is stocks particularly dividend paying stocks, are getting more attractive. Case in point the Utility sector, the worst performing sector so far in 2015, was the only sector to trade higher last week. Duke Energy is up 6% in the last week after hiking their dividend. Consumer staples, telecom and the big cap drug stocks should start to outperform if the broader market continues its slide. This week we'll highlight a stock in a more cyclical sector with a high dividend yield.  The stock of the week is General Motors. GM has come a long way from the 2008 financial crisis, hemorrhaging money to making billions once again. GM obviously got a lot of help from the government, but the turnaround in fundamentals has attracted new investors like Dave Einhorn, Warren Buffett, Leon Cooperman, David Tepper and Kyle Bass. If China continues to weaken and if the US dollar remains strong GM's stock may remain under pressure in the short term. But longer term the stock is now pricing in a lot of bad news and with a dividend yield of 4.4% investors are getting a great income stock with plenty of upside when the economic headwinds subside.

General  Motors has overhauled their expensive and inefficient product-development process streamlining business to save $1 billion per year while also producing vehicles that rival Toyota Motors. CEO Mary Barra has laid out bold goals, such as hiking GM's adjusted pre-tax profit margin, which was recently 5.8%, to between 9% and 10% by "early next decade." The company is boosting profitability in part by shutting down or downsizing less lucrative operations in regions such as Russia, Indonesia, Thailand, and Australia. Meanwhile, it's investing more in areas including China, where GM and its Chinese partners plan to spend $14 billion between 2014 and 2018, opening five new factories and introducing 60 new or refreshed models. Although sales have recently been flat in China despite price cuts, GM's June sales surged 15% in Canada and 4% in the U.S. on a year-over-year basis. China represents a long-term growth opportunity. General Motors is spending $12 billion developing its Cadillac brand and hopes to nearly double Cadillac sales between 2014 and 2020. GM is investing heavily in R&D, too, focusing on advances in weight reduction and fuel economy. Other growth catalysts include a completely revamped Chevy Malibu family sedan, a booming SUV division, and a rebuilt financing arm, General Motors Finance Company.

With all the productivity moves, GM has dramatically improved earnings and cash flow. The stock currently trades for 7 times earnings, 6 times next year's earnings, less than 1 times sales, and 1.4 times book value.  The dividend yield of 4.4% should limit the downside. In the meantime the company can continue to buy back stock with their $5 billion repurchase program waiting for China fundamentals to improve and the US dollar to stabilize. It's always wise to invest alongside the smartest minds on Wallstreet and GM's story has attracted some of the best investors out there including numerous billionaires like Warren Buffett, David Tepper, and Leon Cooperman. GM may see more downside in the short term, but there is plenty of upside in the coming years for this automotive titan with a great dividend to boot.