Is GM Back?

Is GM back? Reuters reports that GM profit tops estimates with an improved profit margin in China and strong truck sales.

General Motors Co (GM.N) reported record quarterly earnings for the third quarter, as strong demand for trucks in North America and improved profit margins in China overcame declining revenues.

GM shares rose 5.3 percent to $35.26 a share and have risen more than $5 since the start of the month. GM posted profit of $1.50 a share in the quarter, well ahead of the $1.18 per share consensus among Wall Street analysts polled by Thomson Reuters I/B/E/S.

GM’s robust quarter, which the company said was its best ever, contrasted with disappointing results from other big U.S. manufacturers, which have wrestled with slowing growth in China and the drag on revenues exerted by the strong U.S. dollar.

For GM, a big key to its good quarter was in North America, where cheap gasoline has fueled surging demand for large pickup trucks and sport utility vehicles, segments where GM is dominant.

This is the company that was previously and for decades was the largest auto maker in the world. And this is the company that resorted to a Chapter 11 bailout and received $33 billion in “debtor-in-possession financing in 2009.  GM emerged from bankruptcy protection in 2009 and made an initial public offering of stock in the new GM in 2010. GM stock has traded between $20 and $40 a share and started paying dividends in early 2014. Is GM back as a solid investment? Are there still problems? And are there opportunities with this stock?

Ignition Switch Scandal

Starting in early 2014 GM recalled more than 30 million vehicles to fix a faulty ignition switch. The issue was that the vehicle could shut off while driving and prevent the airbags from inflating. This issue was known to GM for a decade. The company paid compensation for 124 deaths as well as a $900 million settlement with the federal government. GM hopes that the ignition switch scandal is behind them. However, costs from the scandal are what caused GM to have mediocre earnings instead of exceptional earnings in the third quarter. The New York Times notes that GM earnings beat estimates but overall earnings are held back by the ignition switch scandal.

General Motors’ ignition switch scandal, tied to at least 124 deaths and numerous injuries, dragged down earnings in the third quarter as the company recorded some of the largest financial costs to date stemming from the recall.

The automaker reported on Wednesday that nearly half of its earnings for the quarter, 66 cents a share out of $1.50, were eaten up by $1.5 billion in settlements with federal prosecutors and civil litigants.

If GM continues to sell cars and make money and can put the costs of the ignition switch scandal behind them there is the prospect of much more profitable stock.

Is It Time to Buy GM?

The Street rates GM as a buy.

The company’s strengths can be seen in multiple areas, such as its compelling growth in net income, notable return on equity, good cash flow from operations, solid stock price performance and impressive record of earnings per share growth. We feel its strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated.

It would appear that GM is back as a viable long term investment. As the results of the ignition switch scandal fade the company can be expected to increase its profits and the price of its stock.

Is GM Back? PPT

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