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General Motors Is Undervalued

- By Harsh Jain

It was almost a flat year for General Motors Co. (GM) in 2016 as the stock was up nearly 3%. The stock is off to a decent start heading into 2017. Over the past few quarters, the company has managed to beat analyst estimates in terms of both earnings and revenue.

The company reported robust fourth-quarter 2016 results in February. For the quarter, the company detailed earnings per share of $1.28, exceeding the estimates by 11 cents. Revenue came in at $43.90 billion, again exceeding the estimates by a wide margin of $2.4 billion. That figure also represents a surge of approximately 11% year over year.


For full-year 2016, the company's net revenue came in at $166 billion, a surge of 9% year over year. Furthermore, the company detailed automotive-adjusted free cash flow of $6.9 million, which represents a $4.7 billion increase.

Apart from this, General Motors reported record worldwide sales of nearly 10 million vehicles, a 1.2% increase from 2015. Chevrolet and Cadillac accounted for the two main key drivers of growth in 2016.

Recently, the Detroit-based automaker announced it has ongoing plans to sell its Opel and Vauxhall European operations to PSA Group for approximately $2.3 billion. This may be a wise decision since its European business has lost more than $20 billion since 1999.

Moreover, General Motors detailed it will now belligerently focus on more lucrative markets. The company has already invested largely in innovation. It has four growth initiatives comprising autonomous vehicles, connectivity, ride sharing and alternative propulsion.

Currently, the autonomous car market accounts for one of the hottest growth areas. To gain a strong foothold in this market, the company acquired Cruise Automation, developer of autonomous vehicle technology, for $1 billion in 2016. The acquisition will allow the company to integrate Cruise's technology into its vehicles.

Furthermore, GM is on its way to launch Cadillac CT6 this year, which will have a level two semi-autonomous feature known as Super Cruise. Apart from this, the company also invested $500 million in the ride-sharing service Lyft, which will certainly help its Maven service grow at an even faster rate.

When it comes to dividends, the company has done a great job over the past few years. Currently, the company offers a dividend of 38 cents per share, an eight-cent increase from 2014. The healthy dividend increase is a result of its robust free cash flow.

Summing up

General Motors displayed healthy performance in 2016 and its future prospects look bright. Over the past several years, the automaker has created value through impressive share buybacks and dividend payments to shareholders. Most significantly, selling its European assets will allow the company to aggressively focus on other profitable areas.

The stock currently trades at a price-earnings (P/E) ratio of 6.16, which makes it highly undervalued. As a result, investors should continue their long-term journey with General Motors to gain additional benefits in the future.

Disclosure: No position in the stocks mentioned in this article.

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This article first appeared on GuruFocus.