GM turns bearish on concerns of US market slowdown

Last week, General Motors Company (NYSE: GM) reported a better than anticipated fiscal 2017 second-quarter earnings.

However, the revenues fell short of estimates. Additionally, the second-quarter net income was 40% lower compared to last year. The company is also facing a slowdown in the North American market, which accounts for nearly all of its profit.

Even though General Motors has reaffirmed its FY17 earnings per share guidance, we still forecast a decline in the share price due to reasons given below.

The Detroit, Michigan-based company reported second-quarter 2017 revenues of $36.984 billion, compared with $37.383 billion in the second-quarter last year. The revenue estimate of analysts was $40.15 billion. In Q2 2017, net income attributable to common shareholders declined to $1.660 billion, or $1.09 per share, from $2.866 billion, or $1.81 per share, in Q2 2016.

CNNMoney

Excluding tax effect, among other charges, the adjusted earnings for the recent quarter was $2.876 billion, compared with $2.831 billion in the prior-year period. On a per share basis, the Q2 2017 earnings of $1.89 were greater than $1.79 reported last year and better than analysts’ estimates of $1.69 per share.

The company spent as much as $1 billion to shut down its operations in Europe, restructure its business in India, and divest its business in South Africa. That resulted in a sharp decline in its profit.

Of the $3.68 billion operating profit posted by the company in the second-quarter, the North American operations contributed $3.475 billion. International operations contributed only $340 million in operating profit. South American operations reported a narrowed loss of $23 million, from $118 million last year. The financial arm of GM recorded an operating profit of $357 million.

During the quarter ended June 2017 the company delivered 725,000 vehicles in the US, 852,000 vehicles in China, and 160,000 vehicles in South America. The deliveries grew 1.6% and 18% in China and South America, respectively. In the US, the units of cars sold is down 18% as of date. The truck volumes, however, is up 6%, compared to last year.

After years of stupendous growth, the auto industry is facing a cyclical decline. Additionally, customers’ are also shifting towards SUVs. Thus, GM had to rework their vehicle mix. In April, the company had promised to bring the down the inventories equal to 90 days sales. However, at the end of second-quarter, GM had inventories equal to 105 days sales. The company is trying to bring down the inventory by temporarily closing down several factories.

GM has also reconfirmed its FY17 EPS guidance range of $6.0 to $6.50 per share. Thus, a decline in the net income, slowdown of the US automobile market, and too much dependence on the North American market is expected to keep the stock bearish in the short term.

The MACD indicator’s mainline has crossed below the signal line. Furthermore, the stochastic RSI indicator is declining towards the bearish zone. The stock is also facing resistance at 36. Thus, we forecast a decline in the share price.

In order to capitalize on the anticipated decline, we wish to bet on a put option valid until August 10th . A strike price of about $35 would increase the odds of success.