GM stock is in the gutter. Time to buy?April 1, 2014: 2:17 PM ET
The market has not been kind to General Motors.
Its stock is down about 15% in 2014 as the automaker has contended with seven million recalls and questions from victims' families and government officials about why it took 10 years to recall millions of cars with faulty ignition switches.
Still, General Motors (GM) has roared back since the days of its bankruptcy and government bailout. The stock went on a tear last year and is still up roughly 25% over the past year.
The company has plenty of cash on hand, and there's reason for optimism about the auto industry more broadly, which has already been a bright spot in the economic recovery thus far.
That's why Sterne Agee auto analyst Michael Ward sees GM's latest price drop as a buying opportunity. "It makes the purchase of the stock pretty compelling, particularly if you're looking beyond one day, one week, one month," he said.
Ward cites GM's strong product pipeline, and notes that the company is experiencing strong growth in international markets such as China, where sales of small sport utility vehicles are surging.
GM will also benefit from robust auto demand in the United States over the next three to five years, Ward claims. That's because 40% of the cars on the road now are 12 years or older.
"It's the oldest fleet you've ever seen, and its going to need to be replaced," he said.
Additionally, Ward likes GM's financial position.
The stock trades at around nine times 2014 earnings estimates, according to FactSet. By comparison, Rival Ford (F) trades at 12 times 2014 earnings.
And after emerging from bankruptcy and successfully re-entering the public markets in 2010, the company has $20 billion of cash on its balance sheet.
But that pile of cash is deceiving, according to Matt Stover, an analyst at Guggenheim Securities who isn't buying on the General Motors dip. He mentioned a big debt burden and unfunded pension liabilities as reasons for ongoing concern.
Further, he said GM will be plagued for years by expenses related to the recalls and the subsequent investigations. Such costs include settlements with victims families and possible fines by the government.
Still, Stover believes the bad GM headlines won't keep consumers away from GM dealerships. He said car buyers usually look at third-party review sites such as J.D. Power and Associates rather than the news for advice when buying a car.
"I think consumers are immune to connecting the dots between recalls and quality," he said.
And investors tend to forget about recalls after awhile. Shares of Toyota (TM) are now substantially higher than where they were during the worst of its 2010 recall problems.