Should You Buy General Motors Company (GM) Stock Before Earnings?

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GM Stock - Should You Buy General Motors Company (GM) Stock Before Earnings?

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Skepticism can have a powerful impact on a stock’s performance. General Motors Company (NYSE:GM) is one of those cases. Although GM stock has done well the past few months, an actual breakout seems unlikely thanks to investors’ continued doubts about the broader state of the auto market, and how exactly the company fits in with the industry’s future.

Should You Buy General Motors Company (GM) Stock Before Earnings?
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Back in March, we said we’d rather own General Motors instead of Ford Motor Company (NYSE:F). Ford has a larger dividend yield (5.2% vs 4.2% for GM), but its business isn’t doing as well. General Motors has superior growth and a lower valuation.

General Motors is scheduled to report second-quarter earnings Tuesday before the open. CEO Mary Barra likely will provide an update to GM’s guidance. With any luck, that guidance will come in ahead of the Street’s expectations.

But this is where that skepticism comes in — analysts expect $6.06 in earnings for 2017, but were expecting $6.09 just two months ago. Estimates have not only fallen (albeit slightly) over the past 60 days, but they’re even further below the midpoint of management’s guidance, which would be $6.25. Thing is, if GM were typically spotty on earnings, I could understand analysts low-balling their estimates.

But given that General Motors has a pretty sturdy record of beats over the past couple years, they’ve earned a bit more credibility.

What gives?

What to Expect From General Motors Earnings

Wall Street analysts are looking for $1.69 per share in profits this quarter, on $40.15 billion in revenue. The quarterly EPS estimate is also lower, from $1.75 per share 90 days ago.

“Peak auto” is the largest concern, not necessarily among analysts, but among investors.

Peak auto is simply the idea that the market can’t continue to grow anymore — which would be a terrible development for automakers, forcing names like GM and F to eke out revenue gains by clawing at competitors. Earnings growth would be difficult to come by.

The counterargument is two-fold. The simplest one is that we’re not at peak auto, just hitting a lull. But even those who believe peak auto here don’t all think a sharp decline — say, the roughly 9 million vehicles sold in 2009 — is on the horizon. We could surely churn in this range of 16 million to 18 million annual units.

If that were the case for the next three to five years, would it be all that bad?

General Motors and Ford are quite profitable, and with GM stock trading at less than 6 times earnings, the downside is relatively limited should business remain steady. That would buoy the dividend and possibly justify a larger share buyback plan. And the stock could simply make gains by appreciation of its ample value.

This quarter, don’t expect any talk around these lines, however. Expect Barra & Co. to flash a thumbs-up and discuss its moves in vehicle innovation.

Bottom Line on GM Stock

GM stock chart
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Source: Chart courtesy of StockCharts.com

Its recent pullback over the past two trading sessions could mean a little more upside after it reports, particularly if management tops expectations and has something positive to say about the rest of the year.

But I’ve learned over the years that it’s better to be safe than sorry with automakers. More often than not, even good news is met with (you guessed it) skepticism. And although I like GM stock, I would wait for the company to report before initiating a new position in the stock.

The best result for us would be a pullback to the $34-$35 range. It should find support from its 50-, 100- and 200-day moving averages, all within about 50 cents of each other. If it does, dive in. If it fails, stay away and wait for a new setup.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2017/07/should-you-buy-general-motors-company-gm-stock-before-earnings/.

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