General Motors (GM) said at the end of last week that it expects to exceed its earnings guidance for 2018, and issued an upbeat earnings forecast for 2019, too. The trade conflict between the United States and China has weighed heavily on investor sentiment in 2018, and an optimistic earnings outlook paired with a resolution of the trade conflict could send GM's shares higher over the short haul. An investment in GM at today's price point yields 4.1 percent.
General Motors' shares popped 7.05 percent on Friday after GM projected strong earnings growth for 2019. Year-to-date, General Motors' shares are up a whopping 11.15 percent. Not bad for a company that is at the center of the ongoing trade stalemate between the United States and China.
Source: StockCharts
Earnings Guidance
General Motors had guided for its adjusted earnings to fall into a range of $5.80-$6.20/share in 2018. The auto company previously reduced its earnings guidance from $6.30-$6.60/share on the back of a crippling trade war between the two biggest economies in the world (the earnings revision implied a ~7 percent decrease in midpoint adjusted EPS).
Source: General Motors Investor Presentation
According to the newly released earnings guidance, General Motors will exceed this EPS range for 2018, and also exceed its $4.0 billion adjusted automotive free cash flow forecast. In addition, and more importantly, General Motors sees adjusted earnings and free cash flow growth for the current year: GM expects to earn $6.50-$7.00/share in adjusted EPS and $4.5-6.0 billion in adjusted automotive free cash flow.
Why Is This Earnings Guidance Significant?
It is significant because General Motors, just like Ford Motor (F), has been been heavily punished in 2018 for the trade war between the U.S. and China, and both auto companies have reduced their 2018 earnings forecasts in the second half of 2018 on the back of higher auto, aluminum and steel tariffs.
General Motors' upbeat earnings guidance also comes at a time when investors are still anxious about a volatile stock market and fears over slowing economic growth. The U.S. stock market closed 2018 in negative territory, the first time since the Great Recession a decade ago.
The earnings guidance further comes at a time when the U.S. and China have resumed trade talks, which has been positively received by investors. While a new trade deal between the two largest economies in the world still needs to be worked out, both countries are talking to each other again, and both countries have a huge incentive to finalize a trade agreement in light of growing fears over an economic slowdown. The earnings guidance couldn't have come at a better time.
Valuation
Despite the rebound in GM's share price, the auto company is still dirt-cheap and has an appealing risk/reward ratio.
General Motors' shares cost income investors only 6.3x next year's estimated profits even though the company has guided for a ~12.5 percent increase in adjusted EPS in 2019.
And here's how GM compares against Ford Motor, its closest U.S. peer, in terms of forward P/E ratio.
Risk Factors Investors Need To Consider
The biggest risk factor, as far as I am concerned, is an economic downturn that would likely translate into a downward spiral for domestic vehicle sales. The trade conflict, if not resolved, could also hurt General Motors' stock again, especially if additional levies result as part of a new round of tit-for-tat tariffs. Hence, I recommend investors to limit their exposure to 1-2 percent of total portfolio assets and play it safe.
Your Takeaway
The earnings guidance is a game changer, and GM's stock price reacted accordingly on Friday, surging more than seven percent. GM's upbeat profit outlook could not have come at a better time for investors who are still reeling from the worst December for stocks since the Great Depression in 1931. Earnings and free cash flow growth in this environment strongly tilt the odds in favor of a stable dividend in 2019. A trade resolution between the U.S. and China could be another positive catalyst for GM's shares, which are still dirt-cheap. Buy for income and capital appreciation.
