Is GM stock a buy?

General Motors (GM 4.54%) it was a great deal to have owned this year. The stock is up 30% in 2024 (as of Aug. 22), easily outpacing the 18% gain of most S&P 500 index.

The Detroit automaker is thanking its shareholders at a time when its street rival, I seedecreased by 10%. But it’s GM a smart buy right now? Let’s look at both the bull and bear cases for this auto stock.

GM’s momentum

GM’s business is performing well as the company’s financial results for the second quarter of 2024 (ended June 30) came in well above Wall Street expectations. Posting an impressive top-line performance with sales totaling just under $48 billion was a highlight. Prices continue to be a tailwind.

The management team was happy enough with the numbers that they raised guidance for the full year. adjust earnings before interest and taxes it is now projected to total $14 billion (mid) in 2024.

Like most automakers, GM is pushing aggressively into the electric vehicle (EV) space. Unsurprisingly, the business saw 40% year-on-year unit sales growth in its EV division, faster than the industry as a whole. The Cadillac LYRIQ, GMC Hummer EV and Chevrolet Blazer EV are driving buyer interest.

However, it was not all good news. That growth wasn’t enough to prevent management from scaling back EV-related investments. In addition to the fact that demand trends are softer than industry executives had hoped, it’s also hard to ignore how competitive this field is. In addition, GM is still far from profitable when it comes to selling electric vehicles.

Is GM a quality business?

I think investors would do much better if they only focused on high quality companies. These are the ones you want to own for the long term. One way to identify such businesses is to look for one economic moata term popularized by Warren Buffett. GM doesn’t own one in my opinion.

For example, I don’t think the business has a brand advantage. Competition in the industry is incredibly fierce. And I’m sure that in the eyes of consumers, price is perhaps the most important factor when making a purchase decision. Moreover, there are bigger car companies in the world than this with more brand recognition.

Forsaking the argument that this is not a quality enterprise, I will point out the financially troubling nature of the auto industry. Companies always have to spend a lot on capital expenditure to expand production capacity or research and development. And these expenses are only necessary to maintain current operations, let alone growth.

In addition to marketing expenses, GM has to deal with commodity and labor costs. Changes here can often be beyond his control. This usually results in low operating margins.

GM is a cheap stock

Despite the downsides, which I think long-term investors shouldn’t ignore, one might still want to own GM stock because of the valuation.

The stock is currently trading at a price-earnings ratio from 5.3. This is not a typo. When the market hits all-time highs, it’s surprising to find a company trading at such a cheap multiple, one that represents a whopping 78% discount to the broader S&P 500.

Additionally, investors can certainly appreciate management’s aggressiveness share buybackswhich have helped reduce the number of shares outstanding by 18% over the last 12 months. “Given our belief that GM’s stock price is still undervalued, you should expect us to remain active in future share repurchases,” Chief Financial Officer Paul Jacobson said on the latest earnings call.

Sounds great, but I still don’t see GM as a business worth owning. So I have no problem switching to stock.