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Hills and valleys

21 October 2015 By Kevin Allison

General Motors is accelerating nicely – not that the market is giving it much credit. The Motown giant earned $1.4 billion and posted a record pre-tax margin of 8 percent in the third quarter. Broad concerns about the industry as a whole, though, are hobbling stocks across the industry. And GM is hurting more than others.

The company’s bumper results in the three months to September follow a good second quarter. It’s all grist for Chief Executive Mary Barra’s mill, especially after the distraction last year of its ignition-switch recall fiasco. That cost another $1.5 billion last quarter. Strip that out and earnings per share of $1.50 roared past Wall Street’s consensus $1.18 per-share estimate as GM benefited from strong North American truck sales. China also delivered solid results, countering weakness in Latin America and another loss in Europe.

Shareholders pushed the stock up more than 6 percent on Wednesday. But they have longer-term concerns about both GM and the sector. Weak gas prices, lower materials costs and cheap and easy car loans are all favorable U.S. tailwinds that are bound to fade eventually. Slowing economic growth and rising domestic competition may hurt operations in China.

The Volkswagen emissions scandal has thrown a spotlight on the work the industry still has to do to meet broader environmental standards. Perhaps the biggest worry – and the hardest to factor into valuations – is how much Silicon Valley players like Apple, Google and Uber will disrupt established players.

The combination of these issues may explain why the world’s major manufacturers are saddled with low multiples. Only Honda Motor trades above 10 times expected earnings. That suggests shareholders are skeptical about the industry’s ability to grow as software begins to replace engines and drive trains as the main source of competitive advantage.

GM has good earnings, is cutting costs and may rake in enough cash to warrant returning more to shareholders. Yet it’s one of the worst performers, trading at just under seven times next year’s expected profit, compared to just over eight times at Ford and the nine-times multiple for the sector. The gap is even wider measured as a ratio of enterprise valuation to EBITDA. Investors may have good reasons to question the industry. But they’re making GM suffer more than is warranted.


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