Tech stocks aren't the only ones doing well. General Motors (NYSE: GM) shares have risen 45% in four months as market sentiment rises. It beat the S&P 500 over the same period. Many things must be considered before investors determine how to handle GM in their portfolios. This business and stock's pros and cons will be examined.
Bullish case Investors may wish to buy GM shares due to its strong business performance. In the fourth quarter last year, the company beat Wall Street. Revenue was little under $43 billion, with adjusted EPS of $1.24.
Executives expect a similar industry in 2024. Cost cuts should boost net income to $10.5 billion this year (at the midpoint) from $10.1 billion in 2023. The company's capital allocation policy may please investors. GM earned $11.7 billion automotive free cash flow in 2023. Leadership repurchased shares with $11.1 billion.
GM shares have had a fantastic year, but they're 38% below their peak (March 18). They're cheaply priced. At 5.6, the price-to-earnings ratio is half that of Ford. Value-oriented investors may want to seize this chance.
Bearish argument It's easy to get caught up in GM's recent business progress, but the reasons to avoid the company are compelling. This is still a carmaker, therefore investors must notice. This has several negative effects.
First, growth and profitability trends don't excite investors. Over the past decade, GM's revenue has grown 1% annually. The global auto sector is mature. Only 12% more passenger automobiles were sold worldwide in 2022 than in 2010. This isn't good for most industry businesses
The company's operating margin has averaged 5.8% over the past five years. Margins haven't grown for the company. GM must invest heavily in manufacturing, manpower, and automotive parts, while competitors do the same. This doesn't bode well for margins. Investors must accept industry cyclicality. The motivation and ability to buy new cars is greatly influenced by macroeconomic factors, especially interest rates. Higher borrowing costs deter car buyers. Not knowing what the Federal Reserve will do adds risk and uncertainty for GM.
Competition and macro headwinds are affecting electric automobiles. Management concedes that growth is slowing, but they expect to increase manufacturing capacity to create more units. Even while the industry is changing for a more sustainable future, GM is still a carmaker. Not all demand will rise from past norms.
In the past decade, GM shares have returned 53%, including dividends. Investing in the S&P 500 would have returned 232%. That poor track record is another reason to avoid this stock now.
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