The last few months have been anything but easy for General Motors (NYSE:GM), and by extension, for the owners of GM stock. Though GM stock rose firmly this week in response to reports that China may finally be lowering its automobile import tariffs, General Motors stock is still down 24% from its June peak, with the market pricing in the presumed headwind of the United States’ own newly-imposed tariffs on imported steel.
That added cost may not necessarily be the end of the world, however, if last quarter’s results from Ford Motor (NYSE:F) are any indication. Though GM’s rival still has some cyclical headwinds to contend with, there’s still a buck to be made in the business.
Current and prospective owners of General Motors stock will see if the company is up for the job or not after Wednesday’s closing bell rings. That’s when GM is slated to post its own third-quarter numbers.
Rival Ford Is Surviving
The macro backdrop hasn’t exactly been encouraging for GM stock.
Aside from the 10% tariff on imported aluminum and the 25% tariff on imported steel that President Trump levied in the middle of this year as a means of drawing China to the trade-negotiation table, the automobile industry was already contending with so-called “peak auto”- – a cyclical peak in car sales that was reached (in retrospect) back in 2015. A couple of surges in the meantime were largely the result of devastating hurricanes that prompted consumers to replace their damaged vehicles using insurance money.
The convergence of headwinds prompted GM, Ford and many of their peers to warn of potential problems if the tariffs remain in place. Things may not be quite as dire as they seem, however, given Ford’s third-quarter results which were reported last week.
For the quarter that ended in September, Ford turned $37.7 billion of revenue into an operating profit of 29 cents per share. Both numbers were better than analysts’ consensus estimate of 28 cents per share and revenue of $33.3 billion. Moreover, Ford’s top line rose slightly from the $36.5 billion of sales it had generated a year earlier. Ford’s one sore spot was arguably EPS; it fell to 28 cents from 39 cents a year earlier. In light of the challenges Ford was facing, though, its Q3 results were still relatively good, and its earnings prompted Goldman Sachs to upgrade Ford stock to a “Buy.”
What to Watch in GM’s Earnings Report
Fast forward to tomorrow. That’s when GM’s shareholders will find out if General Motors is holding up just as well as Ford is. As of the latest look, analysts on average are looking for GM to report earnings of $1.25 per share on revenue of $34.85 billion. That sales figure would be a 3.6% improvement on the top line of $33.6 billion that the company reported in the third quarter of 2017. But like Ford, GM’s EPS will probably fall slightly. The company reported EPS of $1.32 per share for the third quarter of 2017.
And yet, even coming up short of the consensus estimates might not be the disaster for GM stock that it would have been just a quarter ago.
Although it’s only a credible rumor at this point, Bloomberg reported on Monday that China was likely to cut its import tax on automobiles by 50%. Such a move by China could open the door to a decision by the United States to ease tariffs on steel and aluminum that its automakers need.
The Bloomberg report will probably be addressed during GM’s conference call.
In the meantime, General Motors arguably needs a plan to do something about the tepid price of GM stock. Though GM stock has a forward price-earnings ratio of just 6.0, investors are skeptical about the shares. Mainstay Capital Management’s chief executive David Kudla explains “In light of flattening to declining sales, GM will need to convince investors its full in-house integration approach to flexible mobility-make the car, write the code, and sell the rides-has high growth opportunity.”
GM’s tone and rhetoric on Wednesday could be just as important as its numbers and data for determining the near-term fate of GM stock.
GM And Electric Vehicles
Meanwhile, the surprising third-quarter profit reported by electric automaker Tesla (NASDAQ:TSLA) may have validated electric vehicles enough to force other automobile companies to finally step up their efforts on that front. GM has publicly called on President Trump to create a nationwide program to incentivize Americans to buy electric vehicles.
Though General Motors is (usually) the second-biggest seller of electric vehicles in the United States, it has been a distant second to Tesla. With electric cars becoming the inevitable future, though, GM appears to be more interested in shaping that future rather than being shaped by it.
That effort, however, won’t yet make a major impact on GM stock. In time, though, electric cars could be a game-changer for GM stock. Investors should start to keep their fingers on the pulse of GM’s electric vehicle work, beginning with its Q3 report and conference call.
As of this writing, James Brumley owned Ford stock. You can follow him on Twitter, at @jbrumley.
