By Al Root

General Motors is too darn cheap -- and the company has a solution to that problem investors should take note of.

Between its earnings and President Donald Trump's trade deal with Japan, it was a wild week for GM. On Tuesday, it reported better-than-expected second-quarter results, but the stock promptly dropped 8.1% in response. Then shares jumped 8.7% on Wednesday, despite Trump announcing a trade deal with Japan that lowered import tariffs on cars from that nation to 15% from 25%.

By Thursday, the stock was trading at 5.2 times 2025 earnings estimates, cheaper than any S&P 500 stock besides Viatris, the former Upjohn division of Pfizer focused on generic drugs, which trades for about four times estimated 2025 earnings.

That low valuation feels undeserved. Earnings weren't really a problem, despite the drop. Citigroup analyst Mike Ward said tariffs -- which investors knew about -- masked what would have been record profit performance in North America, while Deutsche Bank analyst Edison Yu suspected investors were worried about a weaker second half with tariff-related cost increases biting.

The worries aren't unjustified. The Japan deal has the potential to hurt GM, which imports cars from South Korea and Mexico. Both countries still face 25% tariffs. What's more, GM is paying more than the Japanese auto makers for steel, aluminum, and copper, thanks to other Trump tariffs. Yu suspected the Wednesday bump reflects hope that South Korea could get a similar deal as Japan.

Tariffs, and their potential detrimental impacts on vehicle affordability, company profits, global competitiveness, and new-car demand, have hung over the entire auto sector, including GM, for months. Coming into Thursday trading, GM stock was down 1% since the Nov. 5 election, 11 percentage points behind the S&P 500.

But GM can't do much about the tariffs beyond lobbying for changes to them. It does control its capital-return policies, and it's buying back a lot of its stock, taking advantage of its strong cash generation and its ultralow valuation.

GM has spent almost $25 billion on share repurchases over the past three-plus years, causing the number of shares outstanding to drop to 950 million from nearly 1.5 billion over that span. "Free cash flow can easily substantiate an aggressive buyback," added Yu. "Nevertheless, management may need to be much more clear on pacing to earn proper credit from investors."

The recent stop-and-start pacing of share buybacks has been a problem. GM paused its repurchases in the second quarter amid tariff uncertainty. It re-entered the market in July, according to Chief Financial Officer Paul Jacobson. GM still has $4.3 billion in repurchase authorizations remaining, not insignificant for a company with a market value of roughly $50 billion. And despite lower profits due to tariffs, it is expected to generate about $11 billion in free cash flow over the coming 12 months.

The combination of stock buybacks and a cheap valuation makes General Motors stock look attractive at current levels, says Oakmark investment analyst Joe Pittman, noting that many of the firm's funds own the stock. "We think GM is significantly undervalued, [which] provides an opportunity to enhance shareholder value by repurchasing...shares," he says. "It's a great use of cash for them."

And investors will benefit from the buybacks. At current levels, GM could theoretically reduce its share count by another 440 million shares in two years if it spent all its forecasted free cash flow, the amount left over after required spending on investments. That would leave 2027 earnings per share close to $20, based on current projections, up from an expected EPS of less than $10 in 2025.

General Motors management knows that when a stock is that cheap, and free cash flow is strong, it makes sense to buy it. Now investors just need to figure it out.

Write to Al Root at allen.root@dowjones.com

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July 25, 2025 21:30 ET (01:30 GMT)

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