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GM Shares Are Oversold and Earnings Will Prove It, Analysts Say

Stocks in this article: F GM

DETROIT ( TheStreet) -- Perhaps GM (GM) shares have been beaten up a little bit too much.

Shares have fallen 8% year to date for the automaker, which has suffered from recalls as well as revelations of a failed corporate culture adept at shirking responsibility for fatal product flaws. But now several analysts strongly recommended GM shares.

They were slightly less optimistic about Ford (F), which is up 16% year to date.

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On Tuesday, GM shares closed $37.76, up 33 cents, while Ford shares closed at $17.82, up 16%. Both companies will report earnings on Thursday.

Analysts surveyed by Thomson Reuters forecast second-quarter earnings of 58 cents a share for GM and 36 cents for Ford.

Citigroup analyst Itay Michaeli said he expects GM to beat estimates; he has a price target of $48. J.P. Morgan analyst Ryan Brinkman calls GM "our top overall pick." S&P Capital Markets analyst Efraim Levy has a strong buy.

As for Ford, Brinkman on Tuesday trimmed his second-quarter estimate to 34 cents a share, although he retained an overweight rating. Levy has a buy rating on Ford and an $18 price target. Michaeli said he is "not forecasting a second-quarter beat.

Ford stock "has performed well," Michaeli wrote in a report issued Monday. "The immediate reaction to the quarter could initially be modest. However, Q2 data points should support further second half share price momentum."

Brinkman on Tuesday boosted his second-quarter estimate for GM to 55 cents a share, which still trails consensus; he had been at 51 cents. "While the ignition switch recall that emerged in the first quarter is detrimental to valuation, the market overreaction to this now creates a buying opportunity," he wrote, noting that GM trades at a sharp discount to Ford.

"We like both automakers but see more near-term catalysts at GM, whereas Ford must first endure softer F-150 production," Brinkman wrote. "We expect GM results to improve markedly in 2Q, as the profit impact of transitioning to a new line of full-size 'heavy-duty' pickup trucks and large SUVs goes from a modest headwind in 1Q to a significant tailwind in 2Q (whereas) Ford must first endure softer F-150 production in 4Q2014 and 1Q2015 before being rewarded in 2015."

As for the GM recalls, Brinkman said they have cost GM about $5.8 billion to $8.5 billion in market cap, judging from comparisons to the share price gains at suppliers and Ford, respectively. He estimated the total cost of the recall at $4 billion, including $2.5 billion for repair/rental costs to date and $1.2 billion as the projected cost of a penalty payment to the Department of Justice. That leaves several hundred million dollars to settle claims.

Michaeli projected that GM's U.S. light vehicle market share could gain in July and that a scheduled September investor day could be "another possible looming catalyst."

Levy has a $48 price target for GM, which is 10 times expected 2015 EPS. The shares' value is bolstered by a dividend that is currently equivalent to about 3.4%. His $18 price target for Ford is 13.6 times estimated 2014 earnings of $1.32 a share. "We expect 2014 earnings to be depressed before recovering in 2015," he wrote in a recent report.

Written by Ted Reed in Charlotte, N.C.

To contact this writer, click here.

Follow @tedreednc

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stock. TheStreet Ratings team rates GENERAL MOTORS CO as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:

"We rate GENERAL MOTORS CO (GM) a BUY. This is driven by a number of strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, good cash flow from operations and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • GM's revenue growth trails the industry average of 22.2%. Since the same quarter one year prior, revenues slightly increased by 1.4%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • Net operating cash flow has significantly increased by 141.26% to $1,976.00 million when compared to the same quarter last year. In addition, GENERAL MOTORS CO has also vastly surpassed the industry average cash flow growth rate of 42.27%.
  • The debt-to-equity ratio is somewhat low, currently at 0.89, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.81 is somewhat weak and could be cause for future problems.
  • GENERAL MOTORS CO has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has suffered a declining pattern of earnings per share over the past two years. However, we anticipate this trend to reverse over the coming year. During the past fiscal year, GENERAL MOTORS CO reported lower earnings of $2.35 versus $2.93 in the prior year. This year, the market expects an improvement in earnings ($2.87 versus $2.35).
  • In its most recent trading session, GM has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. The stock's price rise over the last year has driven it to a level which is somewhat expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.

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