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Auto Earnings Preview: GM and Ford Report Over Next Few Days

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October 23, 2017
Overhead view of a row of cars parked in a parking lot
istockphoto.com/nonnie192

Among the many companies reporting earnings this week, U.S. automakers General Motors (GM) and Ford (F) release their quarterly results before market open on Tuesday, Oct. 24 and Thursday, Oct. 26, respectively. There’s been a lot of attention on the auto industry in recent quarters. Some of the reasons for that are a sales slump in 2017, especially in passenger cars, the ongoing shift towards electric vehicles and the development of self-driving vehicles.   

September saw a reversal in declining U.S. auto sales, which was largely attributed to the impact of destructive hurricanes in the Southeast U.S. According to estimates from Cox Automotive, the parent company of Kelley Blue Book, Hurricane Harvey destroyed an estimated 300,000 to 500,000 vehicles in the Houston area alone, and Hurricane Irma destroyed an estimated 200,000 to 400,000 vehicles. Total vehicle sales in the U.S., shown in Figure 1 below, significantly spiked from August to September and reversed the downward trend that had persisted so far in 2017.

While the impact of hurricanes is expected to be a transitory one, the shift towards electric vehicles has been an ongoing global transition. For example, the Chinese government has projected 800,000 electric vehicles will be sold 2017. That’s up from 500,000 electric vehicles in 2016. Electric-vehicle demand in China—and many other countries—has been supported by extensive subsidies, which the Chinese government recently announced it would slash by 20%.

Currently, none of the major U.S. automakers operate independently in China, all of them operate through joint ventures with Chinese entities, or import their cars and incur stiff tariffs. The New York Times recently reported Tesla (TSLA) is working with the Chinese government on a deal to build the first wholly-owned manufacturing operation in Shanghai. Another broader trend a lot of companies have set their eyes on is the development of self-driving vehicles. Across industries, companies have been focused on developing the cars, hardware and software that will make them a reality. 

Chart showing U.S. Monthly Vehicle Sales

FIGURE 1: MONTHLY VEHICLE SALES.

U.S. monthly vehicle sales spiked to 18.9 million units in September after steadily declining for most of 2017.  Data Source: Federal Reserve's FRED database. Chart source: thinkorswim® by TD Ameritrade. FRED® is a registered trademark of the Federal Reserve Bank of St. Louis. The Federal Reserve Bank of St. Louis does not sponsor or endorse and is not affiliated with TD Ameritrade. For illustrative purposes only

General Motors Earnings and Options Trading Activity

Since the end of August, GM shares have rocketed higher and are now up about 29.5% for the year. CEO Mary Barra has focused the company on ridesharing,  electric vehicles and self-driving cars. Since its launch in May, GM has slowly rolled out Maven Gig to more cities. The program is geared towards Uber, Lyft and delivery drivers. For a flat weekly fee, drivers can rent cars, including insurance and maintenance, directly from the company. GM is also a large investor in ride-sharing company Lyft.

At the start of October, GM announced it plans to launch 20 new all-electric vehicles by 2023, with two new ones being released in the next 18 months. On the autonomous-vehicle front, GM has been testing a fleet of them in San Francisco and has said it plans to expand the test to New York City in early 2018 pending approval of its application from New York’s Department of Motor Vehicles.

For the third quarter, GM is expected to report adjusted earnings of $1.09 per share, down from $1.72 in the prior-year quarter, on revenue of $36.16 billion, according to third-party consensus analyst estimates. Options traders have priced in about a 2.8% potential share price move in either direction around its upcoming earnings release, according to the Market Maker Move indicator on the thinkorswim® platform.

In short-term trading at the October 27 expiration, calls have been active at the 46 strike price, with a decent amount of activity at the 47 strike in trading today. On the put side, trading has been active at the 42 and 44 strikes. As of this morning, GM’s implied volatility is at the 52nd percentile.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price over a set period of time. Put options represent the right, but not the obligation to sell the underlying security at a predetermined price over a set period of time.

Chart showing GM and Ford YTD performance

FIGURE 2: GM AND FORD YTD PERFORMANCE.

The chart above shows the year-to-date performance as a percentage for General Motors (GM) as the yellow line, Ford (F) as the purple line and the S&P 500 (SPX) as the teal line. Chart source: thinkorswim® by TD Ameritrade.  Data source: Standard & Poor’s. Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Ford Earnings and Options Trading Activity

A lot of the attention has been on new CEO Jim Hackett and his plans for the future of the company. To that end, he’s shared some broader goals focused on cost-cutting initiatives, focus on electric vehicles and autonomous ones, but there hasn’t been a whole lot of details.

In other management news, F recently appointed a new executive to head up its Chinese operations. Jason Kuo took over Ford China in August. Due to the size of the Chinese market and growing middle class, automakers’ operations in the country have been a large focus for analysts. According to Reuters, F is also in the process of exploring a joint venture in China that is focused specifically on manufacturing electric cars.

That’s not the only step F has taken. It created an internal group, dubbed “Team Edison”, to focus on global development of electric vehicles, according to Reuters. Management has also indicated it will reduce spending on combustion-engine research and development, and shift more towards electric vehicles.  On the autonomous-driving front, F announced a collaboration with Lyft to deploy large numbers of self-driving vehicles by 2021 through the ride-sharing company’s network. When it reports on Thursday, F is expected to report adjusted earnings of $0.31 per share, up five cents from the prior-year quarter, on revenue of $33.07 billion, a 0.7% year-over-year decline, according to third-party consensus analyst estimates.

Options traders have priced in about a 2.2% potential share price move in either direction around its upcoming earnings release, according to the Market Maker Move indicator. In short-term options trading at the October 27 expiration, most of the action has been right around the money. Calls have been active at the 12 and 12.5 strikes, while puts have been active at the 11.5 and 12 strikes. As of this morning the stock’s implied volatility is at the 36th percentile.

Looking Ahead

This week is packed full of earnings releases. A lot of eyes will be on Thursday when tech giants Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN) and Intel (INTC) report after the market closes. The European Central Bank is also meeting that same day, potentially adding some more volatility to the mix. Next week, tech giant Apple (AAPL) will open the books after market close on Thursday, Nov. 2. If you have time, make sure to check out today’s market update to see what else is happening.

Good Trading,
JJ
@TDAJJKinahan

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