Strangely, I consider General Motors a potential value investment despite its recent problems.
General Motors (NYSE: GM) is a potential value investment because it makes money and has a low stock price. Plus, GM is changing its business strategy to concentrate on the more lucrative areas of the auto business.
In particular, General Motors is increasing its investments in the profitable truck and van segments, while dumping cars. Dramatically, GM ended production at its Lordstown, Ohio, car factory in March.
Closing Lordstown enables GM to pull the plug on the money-losing Chevy Cruze sedan, CNN Business notes. Plus, General Motors plans to close two more car factories.
However, General Motors could invest up to $1 billion in its truck and van factory in Wentzville, Missouri, The Detroit Free-Press reports. In addition, GM plans to develop an electric-powered pickup truck, The Detroit News reveals.
Why General Motors Loves Pickup trucks
Hence, GM is reinvesting its sources where the company can get the most bang for its buck. Notably, pickup sales drove General Motors’ profits’ up in 1st Quarter 2019, GM Chief Financial Officer Dhivya Suryadevara claims.
To elaborate higher prices on the Chevy Silverado and GMC Sierra are supposedly boosting GM’s profits, The Detroit News claims. However, financial numbers indicate General Motors’ revenues fell from $38.399 billion in 4th Quarter 2018 to $34.878 billion in 1st Quarter 2019.
On the other hand, GM’s gross profit grew from $3.307 billion in 4th Quarter 2018 to $3.343 billion in 1st Quarter 2019. In addition, General Motors’ net income grew from $2.044 billion in 4th Quarter 2018 to $2.157 billion in 1st Quarter 2019. Plus, the operating income grew from $829 million in 4th Quarter 2018 to $1.244 billion in 1st Quarter 2019.
Hence, General Motors can make more money with less resources by building more pickup trucks. For example, GM plans to cut 8,000 jobs or 15% of its American workforce by reducing car production, CNN Business reports. Yet General Motors is expanding its truck business.
Is General Motors Losing Money?
It is easy to see why General Motors wants out of the car business. The company reports negative cash flows for the first time in several quarters on 31 March 2019.
To explain, GM reports an operating cash flow of -$81 million for 1st Quarter 2019; down from $6.03 billion in 4th Quarter 2018. Meanwhile, General Motors records a negative free cash flow of -$2.095 billion for 1st Quarter 2019, down from $3.831 billion in 4th Quarter 2018.
However, GM still reports a financing cash flow of $1.077 billion for 1st Quarter 2019. Thus, General Motors can still generate a lot of cash from its business in tough times.
Finally, General Motors had $23.197 billion in cash and short-term investments on 31 March 2019. However that number is down from $26.010 billion in December 2018. Hence, General Motors is still a cash-rich company despite its problems.
Consequently, General Motors meets the classic value criteria of a good company having some problems. Thus, Warren Buffett’s faith in GM seems justified for the moment.
General Motors is Losing the Pickup Wars
The idea pickup trucks will save General Motors (NYSE: GM) is questionable. In fact, sales figures show GM is falling behinds rivals, Ford (NYSE: F) and Fiat Chrysler (NYSE: FCAU).
In fact, America’s most popular vehicle is the Ford F-Series, Goodcarbardcar estimates. Specifically, Ford sold 76,243 F-Series in March 2019. Meanwhile General Motors’ best-selling pickup was the Chevy Silverado with March 2019 sales of 40,611.
To be fair, General Motors sells fur pickups while Ford only has two. To clarify, Ford also sold 3,347 Rangers in March 2019. GM sold 14,405 GMC Sierras, 11,899 Chevrolet Colorados, and 2,471 GMC Canyons besides the Silverado.
Hence, I estimate GM sold 69,386 pickups in March 2019, or less than one model of Ford pickup. For the record, Ford sold 79,850 pickups in March 2019.
Moreover, General Motors is falling behind Fiat-Chrysler Automobiles (FCA) in the Pickup wars too. To explain, FCA sold 45,187 Ram pickups and 43 Jeep Gladiators in March 2019, Goodcarbadcar calculates.
GM’s Pickup Sales are Falling
Plus, General Motors’ strategy of higher-picked up trucks seems to be failing.
To explain, Silverado sales fell from 52,427 in March 2018 to 40,611 a year later. Goodcarbadcar estimates that is a 22.71% decline. Moreover, all the GM pickup models saw sales drops between 2018 and 2019.
To be fair, Ford saw its F-Series Sales drop by 12.3% from 87,011 in March 2018 to 76,243 in March 2019. However, Ranger sales remained the same between 2018 and 2019.
Finally, business is booming at Fiat-Chrysler where Ram sales grew by 9.39% in 2019. Specifically, Fiat-Chrysler sold 41,307 Rams in March 2018 and 45,187 (Dodge) Ram pickups a year later. Thu I think, Fiat-Chrylser is stealing part of GM’s truck business. Notably, Ram truck sales overtook Silverado sales in 1st Quarter 2019, Trucks.com estimates.
Perhaps, General Motors needs to reconsider its pickup pricing. In addition, GM must inspect Ford and FCA to see what those companies are doing right.
GM is Right to Dump Cars
However, General Motors is doing one thing very right. The company is getting out of the sedan business fast.
Notably, vans, trucks, and sport utility vehicles (SUVs) made up 80% of GM’s sales for 1st Quarter 2019, Autoweek estimates. In addition, General Motors’ car sales volume fell by 21% in 1st Quarter 2019.
Under those circumstances, GM’s strategy of plant closings, job slashing, and model deletion is wise. In fact, I think the market for traditional cars in the United States could soon disappear.
Americans want Trucks and SUVs Not Cars
The sales figures reveal the six bestselling vehicles in the United States in 2018 were all pickups or SUVs. In detail, Fox News estimates America’s six favorite rides in 2018 were:
1. The Ford F-Series pickup – 909,330 total sales.
2. The Chevrolet Silverado pickup -585,581 annual sales.
3. The (Dodge) Ram pickup – 536,980 yearly sales.
4. The Toyota Rav4 SUV – 427,170 annual sales.
5. The Nissan Rogue/Rogue Sport SUV – 412,110 combined annual sales.
6. The Honda CR-V SUV 397,013 total sales for 2018.
Finally, America’s most popular car is the Toyota (NYSE: TCM) Camry with total sales of 343,439 for 2018. Thus, Americans no longer drive sedans, instead they want pickup trucks and SUVs.
Additionally, GM needs to invest some serious money in SUV development. However, General Motors manufactures the only American-branded SUV on the top 10 list, Fox notes. That vehicle is the Chevy Equinox with 2018 sales of 332,618 for 2019.
General Motors is not a Value Investment
However, I do not consider General Motors an overpriced stock with some value characteristics in comparison with its rivals.
To explain, GM shares traded at $38.53 on 7 April 2019 while Ford traded at $10.38 and Fiat Chrysler traded at $15.23 a share. I think Ford and FCA are better companies than GM because of booming pickup sales. In addition, Fiat-Chrysler owns the potent SUV brand Jeep.
On the other hand, GM is an okay income investment because it should pay a 38₵ dividend on 21 June 2019. However, that dividend has not grown since 2016 when it was 36₵. Finally, General Motors shareholders enjoyed a dividend yield of 3.94%, an annualized payout of $1.52 and a payout ratio of 25.5% on 7 April 2019.
Thus, I consider General Motors is a cheap but risky income stock with little growth potential under current conditions.