Despite selling a record 9.9 million vehicles worldwide last year, General Motors shares are trading under the 2010 IPO price of $33. Some believe perception among investors that General Motors and other traditional automotive stocks such as Ford represent the “old school” auto industry could be dragging down GM’s share price.
Last year, the auto giant clocked record sales by selling 9.9 million vehicles worldwide and earning $2.8 billion. As highlighted by ValueWalk, in March, General Motors unveiled a capital allocation framework wherein it would reinvest in its business with the objective of driving a 20 or higher return on invested capital through investments in world-class vehicles and leading technology. The auto giant also indicated that it intended to maintain an investment-grade balance sheet, including a target cash balance of $20 billion.
The capital allocation framework envisages the auto giant returning all of its free cash flow to shareholders. General Motors also announced that it would immediately begin buying back $5 billion worth of stock. The stock repurchase plan was intended to avoid a proxy fight with investor Harry J. Wilson. However, despite these initiatives, GM shares are stuck in neutral.
Interestingly, the automaker’s share price has dropped 4% since June 2013 when it was added to the S&P 500 Index, though the index as a whole is up 29%.
Preference for “new auto industry”
According to a CNBC report, some investors could be preferring the “new auto industry,” which is comprised of companies like Tesla and supplier Mobileye. Since late March, when Tesla was at its most recent low and GM at its most recent high, Tesla’s stock has climbed 55%, while GM shares dropped 16%.
Ken Elias, a partner with automotive consulting firm Maryann Keller & Associates, couldn’t ascribe any reason as to why investors are shrugging their shoulders when it comes to GM. He said, “GM has made amazing strides. It has a robust portfolio and every vehicle is sold.”
Companies like Tesla are steeped in technology for electric and autonomous-driving vehicles. Though some view this to be one of the growth engines of the future for the auto industry, Elias called this perception short-sighted.
However, General Motors has invited some scepticism that’s dragged down its shares. For instance, it was embroiled in a scandal in connection with defective ignition switches that ultimately lead to congressional hearings and the recall of 2.6 million vehicles, which weighed on GM’s stock for much of last year. As outlined by ValueWalk, last year General Motors had to issue 68 previous recall notices on over 29 million vehicles around the world, though some of the 29 million vehicles are counted twice because they are being recalled for multiple defects.
Despite these issues, Elias exudes confidence on the auto giant and said, “GM, in my opinion, is one of the better auto companies, and the future has never been brighter for the auto industry.”