Several new products have reinforced General Motors Company (NYSE:GM)’ offering, as the quality of their cars has considerably improved in relation to the last few decades. Since excellence has proven to be central in the auto business, the new models should drive the firm’s profit growth and margin expansion.
GM´s top risk resides in Europe, resulting in losses for over a decade now. Morningstar analysts expect this trend to continue for at least a couple more years. Nevertheless, medium and long-term profitability should increase as the firm´s high degree of operating leverage starts to retrieve results, generating upside for investors. For the patient investors, General Motors is definitely a buy.
A promising stock
In the unconventional automotive business, there´s Tesla Motors Inc (NASDAQ:TSLA), that manufactures and designs electric vehicles and electric powertrain components. Just a month ago, the stock price was around $35 and the outlook didn´t seem promising. However, the stock now trades at around $55 as the firm is now expected to post its first profitable quarter by May as their Model S car becomes successful. Although some investors believe it´s already too late to buy this stock, patient investors should take a look as long-term prospects look pretty positive.
Even though the Model S is an expensive car, the U.S. market is proving to be increasingly willing to pay a higher price for a product that offers the excellence that a Motor Trend car of the year like this provides. In addition, the growing production scale combined with the decreasing trend in the Lithium Ion battery prices that the car uses will progressively lower the production costs, given that the battery pack accounts for roughly 25% of a car´s production cost. McKinsey analysts estimate that these prices could decrease another 25% by 2020.
Tesla Motors Inc (NASDAQ:TSLA)’s retail model is also a growth factor. Disrupting the auto business, the firm sells its cars through a few company-owned stores, principally situated in malls, instead of doing this through franchise dealerships. Despite the legal actions taken against Tesla Motors Inc (NASDAQ:TSLA) by some car dealers, the company could stand its position and continue to exercise its particular strategy in various U.S. states, while the upcoming decision in Texas could enhance the stock price.
Conclusions
Since Ford is cheap, it is not a surprise that many analysts (Goldman Sachs, Morgan Stanley) recommend buying the stock. Also trading at similar P/E ratio while offering plenty of upside is General Motors Company (NYSE:GM).
For those looking for less conventional and longer-term investments, Tesla Motors Inc (NASDAQ:TSLA) should be their choice. The stock currently seems quite undervalued given the long-term growth potential of this company.
The article 3 Stocks to Watch in the Auto Sector originally appeared on Fool.com and is written by Victor Selva.
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