General Motors (NYSE:GM) is one of the leading automobile companies in the world, generating well over $100 billion of sales annually. However, the company’s stock prices have tumbled lately, bringing the company’s market cap, at one point, to slightly below $30 billion.
The $30 billion market cap for GM was never seen anywhere in the last 5 years from 2015 to 2020. While the stock price has recovered as of this article was published, GM’s market capitalization was still valued way below its historical average of $50 billion.
Is GM really worth this low? Let’s take a look.
In this article, we will look at GM’s stock valuation from the perspective of 5 ratios and they are market capitalization to revenue or sales (price to sales), market cap to total equity (price to book value), market cap to net profit, market cap to free cash flow (price to free cash flow) and market cap to the adjusted earnings before interest and tax (price to EBIT).
These ratios will be analyzed over multiple years and the respective historical valuation will be compared with the current valuation to find out how far the current valuation has gone with respect to its historical values.
Just sit tight and read on!
How the Data Are Plotted
GM’s stock price was measured on a weekly basis. However, variables such as revenue, book value, free cash flow, etc were measured on a quarterly basis and were plotted in the chart according to the date the financial results were officially released by the company such as in a conference call. This is done to reflect the market sentiment on the stock price with respect to the released financial data.
While fundamental data such as revenue, profit, free cash flow were measured on a quarterly basis, the trailing 12 months (TTM) methodology was used when laying out the data in the chart except for the book value data in which the most recent quarter (MRQ) data was used.
To find out more about the TTM method, you may visit Investopedia explanation on TTM.
How Accurate Are the Ratios
The snapshot above shows the valuation data extracted from Yahoo Finance.
The data above is used to compare against the data in the following series of chart and the comparison result is that they are closely matched.
Do note that the charts were plotted on a weekly basis. Therefore, they may not be as refined as a chart plotted on a daily basis. Yet, they are good enough to show the big picture of GM’s market valuation.
GM’s Market Capitalization
Before diving into the ratios, let’s have a quick look at General Motors’ market capitalization which is shown in the chart above over the past 5 years from 2015 to 2020.
Based on the current chart, GM’s market cap averaged around $50 billion between 2015 and 2019. At some points between 2017 and 2018, the company’s market cap has even exceeded $60 billion.
However, GM’s market cap dipped drastically to less than $30 billion in 1Q 2020 at the onset of the COVID-19 pandemic. Before long, the company’s market cap recovered slightly to $40 billion moving into 2Q 2020.
In short, GM’s current market valuation of around $40 billion was more than $10 billion off its historical value of $50 billion.
GM’s Market Cap to Revenue Ratio
The chart above shows GM’s market cap to revenue ratio from 2016 to 2020. The market cap to revenue ratio is also referred to as the price to sales ratio.
As seen in the chart, GM’s price to sales ratio has been steadily rising from 0.30 in 2016 to around 0.35 in 2019. Before long, the price to sales ratio tumbled significantly to only 0.20 in 1Q 2020 before recovering to around 0.28 as of July 2020.
The dramatic decline of the ratio in early 2020 was mainly driven by the onset of the COVID-19 pandemic.
As of July 2020, GM’s market cap to revenue ratio of around 0.28 was only slightly below its historical valuation of 0.30 which was seen only in 2016.
In short, you can say that the current valuation for GM’s market cap with respect to sales was relatively low compared to its historical high of 0.35 which was seen from 2017 to 2019.
GM’s Market Cap to Book Value Ratio
In terms of price over book value ratio, the chart above shows that GM’s current market valuation with respect to equity or book values was at a historical low of around 0.90.
Take note that this valuation was still slightly higher compared to the worst value of 0.60 which was seen during 1Q 2020.
Nevertheless, at this market valuation, GM’s stock price was traded below its book value since 2020.
Prior to 2020, GM has been valued higher at a market cap to equity ratio of around 1.2. During 2018, the ratio has even gone above 1.6.
However, we can see that the price to book value ratio started to decline from 1.4 in 2018 to only 1.0 by the end of 2019.
At 1.0 price to book value, GM’s market valuation was relatively the same as its book value.
GM’s Market Cap to Net Profit Ratio
Another valuation ratio that is worth looking at is the market capitalization to net profit ratio which is shown in the chart above over the last 5 years from 2016 to 2020.
For your information, net profit is the final profit available to common stockholders. The net profit has taken care of all the costs of doing business such as costs of goods sold, operating costs, R&D and SGA as well as tax and interest expenses.
Based on the chart above, GM’s valuation relative to net profit has not dramatically changed except during 2018 when the company reported a loss of nearly $4 billion in FY2017.
The huge losses in 2017 have caused GM’s valuation relative to net profit in 2018 to tumble to the negative territories as seen in the chart above.
Nonetheless, the company’s valuation recovered since 2019 when it was back to profitability. The market cap to net profit ratio recovery also followed suit and was averaged around 6 when the company’s TTM net profit was $9 billion in 2019.
However, GM’s TTM net profit tumbled by the end of 2019 and early 2020 to slightly less than $5 billion and has resulted in the price to net profit ratio ticking higher to 10 as shown in the chart.
GM’s Market Cap to Free Cash Flow Ratio
Since free cash flow is the lifeline of a business, we will also look at GM’s market valuation with respect to free cash flow which is shown in the chart above over the last 5 years from 2016 to 2020.
For your information, free cash flow is defined as the operating cash flow minus the capital expenditure.
According to the chart, GM’s valuation relative to free cash flow was the highest at 18 in 2016. However, the figure slowly declined over the years and reached a new low at around 4.0 as of July 2020.
The sinking price to free cash flow ratio indicates that GM’s free cash flow generation has been pretty consistent over the years despite declining profitability.
In fact, GM’s free cash flow generation has even been trending higher and reached close to $10 billion in 1Q 2020 on a TTM basis.
Coupled with the declining stock prices, GM’s market value traded at only 4 times its free cash flow as of July 2020.
At only 4 times of free cash flow, GM’s stock valuation with respect to free cash flow was the lowest as of 2Q 2020.
GM’s Market Cap to Adjusted EBIT
The last ratio that tracks General Motors’ stock valuation is the price to adjusted EBIT or earnings before interest and tax ratio which is shown in the above chart.
The adjusted EBIT is based on GM’s management adjusted earnings and is a non-GAAP measurement.
According to GM’s management, the adjusted EBIT was modified to only measure the company’s core operations and excludes all non-core related items such as impairment charges, exit costs resulting from a strategic shift in operation, cost arising from recall and other related legal matters, etc.
The adjusted EBIT is roughly the same as the EBIT under GAAP accounting guidelines in which depreciation and amortization costs are accounted for. In short, the adjusted EBIT was a measure of the company’s profitability before measuring interest and tax expenses and is a more refined version of the non-adjusted EBIT.
Coming back to the chart above, we can see that GM’s stock valuation ratio relative to the adjusted EBIT has been steadily rising from 2016 to 2020.
GM was trading at only 4 times the adjusted EBIT back in 2016 but the valuation has gone up to 5 times the adjusted EBIT as of July 2020.
At this figure, GM’s stock valuation relative to the adjusted EBIT was at a historical high, indicating that the company’s core operating profits may have declined in 2020.
Even with declining stock prices, the company’s stock price to adjusted earnings was still at a historical high as of July 2020, illustrating that the adjusted EBIT must have been getting worse over the years.
It’s no surprise when we further investigated the adjusted EBIT and found that the figure was only $7 billion on a TTM basis as of 2Q 2020, which was 50% less than the $13 billion reported in 2017.
Of all the ratios that we have seen, only the price to adjusted earnings before interest and tax (adjusted-EBIT) ratio was at an all-time high compared to its historical values.
In contrast, GM’s price to free cash flow ratio was at a historical low of around 4.0, indicating that the company was trading at only 4 times its free cash flow in 2Q 2020.
My take is that GM’s stock valuation was neither cheap nor expensive at the current stock price as of this article was published. The reason is that GM’s core earnings have been weakening as seen from the increasing price to earnings ratio (adjusted-EBIT).
However, the company’s cash flow generation has been pretty strong as reflected by the low price to free cash flow ratio.
In short, if you believe free cash flow is a critical factor moving forward, I guess GM’s stock is a buy at current market valuation.
References and Credits
1. All financial figures in this article were obtained and referenced from GM earnings releases and presentations.
2. Featured images were used under Creative Common License and obtained from marc falardeau.
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