After General Motors (NYSE: GM) reported second-quarter results that exceeded expectations, investors responded with enthusiasm, pushing the stock past $80 and driving trading volume up by 25% by the close of the session. CFO Paul Jacobson made headlines during a live interview on CNBC, where he confidently described the company’s shares as still being a bargain, despite the stock rising over 40% in the past year. His claim seems to hold weight when considering GM's current valuation. The company trades at a forward P/E ratio below 7, significantly lower than what's typical for the broader automotive sector.
The second-quarter results showed strong cash generation, with automotive free cash flow hitting $5 billion—an impressive 78% increase from the same period a year ago. This improvement helped drive an expansion in adjusted EBIT margin of 2.5 percentage points. GM has also continued to outperform its peers, especially in the lucrative full-size pickup truck segment. Revenue from the software and services side of the business is also growing rapidly, with offerings like OnStar and Super Cruise contributing to double-digit revenue growth in the quarter.
GM’s defense segment, a newer part of its business, is gaining momentum and is now expected to turn a profit by the end of the year. To support growth and returns, the company used $2 billion in the second quarter to repurchase 25 million shares. These buybacks are helping reduce the number of shares outstanding, a trend that has cut the total count by 8% this year and 35% over the past three years. As a result, earnings per share could see further upward momentum. That said, on a GAAP basis, GM’s net income dipped by 31% year-over-year, a decline mainly attributed to one-time charges tied to changes in its electric vehicle strategy.
A key concern for investors is GM’s declining market share in the U.S. Over the past year, its position in the home market dropped from 17.4% to 16.6%. While some of this decline is due to strategic decisions like discontinuing specific vehicle models and reducing EV incentives—which had previously benefited GM—it still raises questions. Revenue growth itself was modest, coming in at just under 2% for the year, suggesting that despite strong profits, the company’s ability to grow overall is limited. This could signal a shift in investor focus from revenue to earnings quality.
One of the more surprising numbers in the report was a $2.3 billion charge related to scaling back GM’s electric vehicle strategy. This had a direct impact on GAAP net income and complicated the company’s financial picture. However, Jacobson remained positive, noting that adjusted earnings for the first half of the year were a record high, surging 25% compared to any first half in the company’s history. This strong performance was enough to justify the raised full-year guidance on adjusted EPS, free cash flow, and other metrics.
One long-term investor expressed confidence in GM, stating that it is their largest stock holding. They believe in the company’s long-term potential, especially given its track record of innovation, cost reductions, and shareholder-friendly practices. However, not everyone is convinced. The Motley Fool Stock Advisor team, which recently published its list of the 10 best stocks to buy, did not include GM. Their picks focus on companies they see as having strong growth potential, with past selections such as Netflix (which was included on December 17, 2004) showing the team's strategy of picking high-conviction growth plays. While GM's low valuation and momentum make it appealing, the cyclical nature of the automotive industry remains a risk.
The insurance segment, which GM acquired and quickly scaled, expanded rapidly in the first half of the year, growing from three to 21 states. This rapid expansion, however, is still in early stages and may take some time to show strong returns. The decision to scale back its EV strategy and record a $2.3 billion write-down highlights the challenges of making large strategic decisions in a fast-moving industry. Although GM’s free cash flow remains strong, signs point to slower growth. While the company’s valuation appears attractively low and its cash generation is robust, investors should keep a close eye on how margins develop and how GM’s market position evolves in the months ahead.