General Motors trades at $81.98 and has moved in lockstep with the market. Its shares have returned 8.9% over the last six months while the S&P 500 has gained 11%.
Is now the time to buy General Motors, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is General Motors Not Exciting?
We’re sitting this one out for now. Here are three reasons you should be careful with GM, plus one stock we’d rather own.
1. Lackluster Revenue Growth
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. General Motors’s recent performance shows its demand has slowed as its annualized revenue growth of 2.8% over the last two years was below its five-year trend. We’re wary when companies in the sector see decelerations in revenue growth, as it could signal changing consumer tastes aided by low switching costs. 
2. Low Gross Margin Reveals Weak Structural Profitability
Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.
General Motors has bad unit economics for an industrials business, signaling it operates in a competitive market. This is also because it’s an automobile manufacturer.
Automobile manufacturers have structurally lower profitability as they often break even on the initial sale of vehicles and instead make money on parts and servicing, which come many years later - this explains why new entrants such as Rivian, Lucid, and Nikola have negative gross margins. As you can see below, these dynamics culminated in an average 12.1% gross margin for General Motors over the last five years.
3. Shrinking Operating Margin
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Looking at the trend in its profitability, General Motors’s operating margin decreased by 5 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. General Motors’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was 1.3%.
Final Judgment
General Motors isn’t a terrible business, but it doesn’t pass our quality test. That said, the stock currently trades at 6.4× forward P/E (or $81.98 per share). While this valuation is optically cheap, the potential downside is big given its shaky fundamentals. We’re fairly confident there are better stocks to buy right now. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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