Mike from Maryville, TN asks about my thoughts on GM stock. GM has a lot of new initiatives underway and there is no doubt that Mary Barra is visionary CEO. I can’t help but believe there is a bright future for GM as long as she sticks around. The new products coming out of GM feel like those coming out of an engineering company.
But we’ve got to be strict about what we buy. There are plenty of great companies out there trading at too high a valuation. Let’s see where GM currently falls.
Let’s tackle the elephant in the room first. GM has $24B of cash in the coffers. They have some loose change to continue their rapid pace of investing. However, they also have $109B in long term debt. Ouch. Their debt is 10x their net income of $11B. It’s hard to overlook this. It would take GM eight years to pay off its debts without some serious growth.
Growth is the next topic. GM has no track record to stand on here. Growth has been flat over the last five and ten year periods. Revenue is actually down. The net income must be flat because of higher margins. While there is a chip shortage, there has also been stimulus.
What should we pay for a non-growth company in this environment? I think a P/E of 7-10 is OK. Especially for a company where I have this amount of conviction in the leadership.
At first glance, it looks like GM has a P/E of 8.42. That’s right in line! However, we have to consider that debt. GM has a market cap of $91B, but let’s add the $85B in debt that we can’t immediately pay off. That brings the market cap to $176B. At that market cap, the real P/E of GM is 16 right now.
I don’t think GM is a good buy at a P/E of 16. While the stock trades at $63.42 right now, my fair value price is $27.58. That’s a P/E of 7 with debt included.
For Mike, I’d say either wait for GM to go on sale sub $30 or wait until GM actually starts showing growth. If the company really does start growing net income 16% year, then $63 is a fair price. But let’s give this big ship time to actually turn before betting that it will.