$GM Q3 Earnings Cheat Sheet

by Enis October 21, 2014 1:46 pm • Commentary

Event:  GM reports Q3 earnings on Thursday, Oct 23rd, before the open  The options market is implying about a 3.75% one day move, which is above both the 4 qtr avg move of 2%, and the 8 qtr avg of about 3%.

Sentiment:  Wall Street analysts are relatively neutral on GM, with 14 buys, 7 holds, and 4 sells, though they have a high average 12 month price target of around $41.50.  The stock has been a dismal performer in 2014, down 25% year-to-date, and at an 18 month low last week.  Short interest remains subdued at around 3% of the float.

Options Open Interest:  Total open interest is skewed towards calls over puts by a ratio of 1.45 to 1.  The past 1 month of activity has also been skewed towards calls by a ratio of 1.4 to 1.  The Oct31st 31.50 strike call has over 34k of open interest, by far the most of near-term maturities.  Outside of that strike, the bulk of the open interest is in Jan15 expiration, concentrated between the 30 and 40 strikes.

Price Action / Technicals:  GM has been in a downtrend ever since it hit a new post-IPO high in December:

GM weekly chart, courtesy of Bloomberg
GM weekly chart, courtesy of Bloomberg

The stock’s critical level is around $30, which was breached for the first time since the spring of 2013 last week.  However, the stock ended up closing the week above $30, and that’s the spot to watch after earnings.

On the upside, the first level to watch is $32, which was support on a couple occasions earlier this year:

GM daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg
GM daily chart, 50 day ma in pink, 200 day ma in yellow, courtesy of Bloomberg

Regardless, GM has a lot of upside supply given the trading that occurred between $32 and $36 in 2014.

Volatility:  30 day implied volatility hit a 2 year high in GM last week::

GM 30 day implied volatility, courtesy of Bloomberg
GM 30 day implied volatility, courtesy of Bloomberg

Implied volatility has fallen back to the 30 level, but this chart is enough evidence that GM implied volatility is more likely to move with the broader market than simply due to earnings this week.

Our View:  GM has looked cheap fundamentally on a P/E basis for several years, but the stock’s performance has been weak nonetheless.  The problem is that analyst estimates for GM are perpetually optimistic, despite the cyclical nature of GM’s business.  As a result, investors are not willing to place a high multiple on GM stock.  The real question in investing in GM is whether you think earnings will grow or contract going forward.  That’s a much tougher question to answer than whether the stock looks cheap on valuation.