Has GM Stock Run Out of Upside?

Last Tuesday, General Motors (NYSE: GM) posted another strong quarterly profit. While GM's profit fell significantly on a year-over-year basis -- even excluding charges related to the sale of its European operations -- the company still posted adjusted earnings per share of $1.32, which was $0.20 ahead of the average analyst estimate.

GM stock rose on Tuesday, following the favorable earnings report. However, it gave back all of its gains and then some over the next three days, after a widely followed auto analyst cut his rating on the stock, saying it had risen too far. Yet GM stock remains quite cheap, and the company has meaningful opportunities to further improve its earnings in the years ahead. This suggests that the stock has plenty of potential to continue rising.

GM overcomes severe headwinds

Last quarter, General Motors had to cut output 26% year over year in its core North American market. This cut included planned downtime related to future product launches, lower production of slow-selling passenger cars to facilitate an inventory correction, and (to some extent) the impact of a strike at the Canadian plant that builds the popular Chevy Equinox crossover.

GM had to reduce its production significantly in the third quarter. Image source: General Motors.

In years past, a production cut of this magnitude would have wiped out GM's profit. Instead, the company managed to squeeze out an adjusted operating margin of 8.3% in North America. While GM North America had achieved a spectacular 11.5% adjusted operating margin a year earlier, the Q3 2017 performance proves that the General will be able to withstand a future sales slowdown.

GM's other business segments all reported year-over-year earnings growth for the third quarter, which helped cushion the blow from lower earnings in North America. Furthermore, adjusted operating profit is down less than 5% year to date for GM's continuing operations -- and the outlook for the fourth quarter is solid.

Is GM stock overvalued?

Even though General Motors posted solid results in the face of lower North American production last quarter, auto analyst Adam Jonas cut his rating on GM stock on the day after the earnings report. With the stock having surged by about 50% in the past year, Jonas now gives it the equivalent of a "neutral" rating, with a $43 price target, slightly below GM's current stock price.

Source: yahoo