Value-focused investors are constantly on the lookout for stocks that are priced below their intrinsic value. One such stock that deserves attention is General Motors Co (GM, Financial). The stock, currently priced at 34.24, recorded a gain of 1.72% in a day and a 3-month decrease of 9.66%. The fair valuation of the stock is estimated at $54.23, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at, the GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
Despite its seemingly attractive valuation, certain risk factors associated with General Motors Co should not be overlooked. These risks are primarily reflected through its low Altman Z-score of 1.25. These indicators suggest that General Motors Co, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
What is the Altman Z-score?
The Altman Z-score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
An Overview of General Motors Co
General Motors Co emerged from the bankruptcy of General Motors Corp. (old GM) in July 2009. GM has eight brands and operates under four segments: GM North America, GM International, Cruise, and GM Financial. The United States now has four brands instead of eight under old GM. The company regained its U.S. market share leader crown in 2022, after losing it to Toyota due to the chip shortage in 2021, with share up 170 basis points to 16.4%, a full percentage point ahead of Toyota.
General Motors Co's Low Altman Z-Score: A Breakdown of Key Drivers
An analysis of General Motors Co's EBIT to Total Assets ratio from historical data (2021: 0.07; 2022: 0.04; 2023: 0.05) indicates a recent dip following an initial rise. This reduction suggests that General Motors Co might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
The data: 2021: 0.59; 2022: 0.54; 2023: 0.64 from the past three years suggests a recent decline following an initial increase in this ratio. The asset turnover ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services.
Conclusion: Is General Motors Co a Value Trap?
Despite its seemingly attractive valuation, the low Altman Z-score, coupled with the recent decline in its EBIT to Total Assets ratio and asset turnover, suggest that General Motors Co might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
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