Get Ready for GM to Catch Up


Now that the government is nearing the end of its ownership position in General Motors , are you ready to invest? Many indicators suggest the next couple of years will be a boom period for the recovering U.S. automaker -- strong balance sheet, brand-new product cycle, double-digit growth in emerging markets, and more. The biggest problem the company faces is its name. With the bailout still fresh in investors' memory (not to mention in taxpayers' pockets), the market may continue to assign lower valuations, regardless of its intrinsic strength. As one of the cheapest stocks in the sector, should you give GM a second chance?

Improving fundamentals
If GM was part of the NCAA tournament, Dick Vitale would be praising fundamentals, baby. The company has come a long way from its early bailout days.

The company has nearly $30 billion in cash, equivalents, and short-term investments, accounting for almost 80% of its current market cap. Long-term debt is under $3.5 billion. The company's days of overproducing cars that no one wants and end up as rentals are (hopefully) over, and it's evident in fewer incentives and higher margins.

GM is rolling out plenty of new models, and, as mentioned in an analyst report, there is a very strong correlation in truck sales to the housing recovery. With all of these bullish indicators, should the company begin to trade more like its peers?

Multiple correction
New-vehicle sales for the industry as a whole are up and should continue to rise in the foreseeable future. Recently, Toyota 's North American chief appeared quite confident about the region's auto sales -- citing that the average vehicle age is at an all-time high of more than 11 years. And even though there remains uncertainty regarding the ongoing economic recovery, consumers are probably encouraged by their rising 401(k)s and promising job data. One of the biggest factors is that borrowing remains incredibly cheap. Regardless of your cash position, it's a no-brainer, for those with good credit, to finance a new vehicle purchase at near-zero rates.

GM has an attractive lineup of vehicles coming out in addition to its current stable, and the company is expecting certain segments -- trucks, specifically -- to sell more luxurious models than in prior periods.

All the while, GM trades at just 6.4 times one-year forward earnings. That's cheap for any automaker, not to mention one on the brink of a new product cycle. For comparison, Toyota trades at more than 13 times forward earnings. Ford trades at 7.6, but it has shown investors a track record of encouraging performance in recent years, unlike GM.

As the U.S. government exits its position, and investor faith restores, look for a multiple correction in GM's stock price -- and, remember, that's not even factoring in upside potential in its operating business.

Worried about GM?
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Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Ford and General Motors and owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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