Pros, Cons to Buying General Motors Stock
Founded in 1908, General Motors Company (ticker: GM) is the epitome of the great American auto manufacturer, producing vehicles in 37 countries across the globe.
The auto giant has come a long way in the last 110 years, when William C. Durant founded the company with $2,000 in his pocket. General Motors today has a market capitalization around $52 billion.
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With valued auto brands like Buick, Chevrolet, Wuling, GMC and Cadillac, General Motors seems poised to reclaim its mantle of the greatest auto manufacturer on Earth -- but to do that, the company is going to have to clear some serious hurdles.
General Motors Stock at a Glance
GM, currently trading just over $36 per share, has hit some potholes in recent years, even going into bankruptcy in 2009. But the company seems to be on the rebound, offers a strong dividend and has upside room for share price growth as it changes both its corporate culture and business model.
Analysts have pegged one-year share growth at $47.42 per share, a welcome sign for shareholders who already enjoy 4.2% dividend payments.
GM stock has benefited from taxpayer largesse -- the company may not even exist today if it weren't for an $80 billion bailout from the Troubled Asset Relief Program (TARP) at the height of the Great Recession. As Fritz Henderson, GM's then-president put it at the time -- "There is no Plan B."
Doubts over slow-to-move stock prices and completely static revenues both haunt GM right now, with no clear sign when and if the company will emerge from its current state to start posting some positive stock numbers.
Pros to Buying GM Stock
Whether you're all in on GM stock depends on your faith in the company completing something of a miraculous comeback. That's a murky outlook right now as GM seems to be taking a back seat to other auto manufacturers in terms of consumer popularity.
The most commonly cited reasons for owning GM among users are its tech-forward decisions like the acquisition of Cruise Automation and its partnership with Lyft ( LYFT). "Users also believe the new mid-engine Corvette is a sign of innovation and exciting design -- an evolution that could attract new customers," says Bernard George, chief executive officer of NVSTR, a digital-based investment services firm. "But that all could be outweighed by commonly cited risks for GM, including tariffs and pressure to manufacture in the U.S., which could increase GM's cost structure."
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One major pro for General Motors stock is the company's fresh new deal with the United Autoworkers, the massive union that for many carmakers can spell gloom or doom should a strike arise. Putting 48,000 workers back to work under a four-year deal cannot be bad for GM shareholders, who need some peace of mind after a month of nervous worrying about production problems.
Many investors were betting that Tesla ( TSLA) would be the big winner in the electric car sweepstakes, says Robert R. Johnson, professor of finance at Creighton University in Nebraska. "Yet given all of the attendant problems with Tesla management, its huge debt load, and atmospheric valuation, I believe that a much more prudent investment is GM at a forward (price-earnings ratio) of (5.5) times rather than Tesla at a forward P/E of (63)" he says. "Investors committing funds to GM have a much higher margin of safety than those in Tesla."
That said, Johnson is more bullish on General Motors stock as a long-term play. "It really is anybody's guess where any stock goes in the near term," he says. "I am much more confident that GM will likely provide investors with solid returns over the next 10 years."
Cons to Buying GM Stock
One glaring issue with GM that's hard to refute or deny: its sales appear to be in a secular, multi-year decline. In fact, revenue has stumbled in three out of the last four years, and between 2014 and 2018 -- a time when the economy was undoubtedly on the uptick -- revenue plunged from $155.9 billion to $147 billion.
For companies like GM, which operate in traditionally cyclical industries, that's a concern. And with analysts expecting even more dramatic declines in 2019, (i.e., sales down 6.2%) the company just hasn't proven to be very resilient, at least since emerging from bankruptcy a decade ago.
Another risk to GM stock that shareholders should be honest with themselves about is the tentative agreement between UAW and the GM top brass for nearly 50,000 employees to return to work. Although rare, it's not unheard of for a deal at such a stage to implode, as happened with Fiat Chrysler ( FCAU) about four years ago.
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Investors have already largely baked in the fact that the UAW debacle is in the rear view mirror; it's viewed by Wall Street as more or less a done deal. Should that, for whatever reason, not be consummated in a timely fashion or should the terms change, GM stock could be in for some truly woeful performance.
The Bottom Line on GM Stock
GM stock is up 8% year-to-date, and although that's better than nothing, it's an underperformance when compared to the 20% gains seen by the S&P 500. That said, a consensus target price above $47 -- representing 30% upside -- alongside a 4.2% dividend both make GM look like a compelling stock to buy today.
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