Making Yet Another U-Turn on General Motors

General Motors (NYSE:GM) last had my attention in July 2014 in a post in which I talked about making a U-turn on GM options. I wrote that post as a sequel to an earlier post in which I had recommended buying GM call options. My July 2014 coverage of General Motors included buying GM put options in which I had a $33 price target on General Electric by January and the GM put options did turn a handsome profit when the stock fell as low as $28.33 on October 15.

We will be doing another U-turn on the options of General Motors today as we examine GM call options. General Motors with its market capitalization of $59.49B designs build and sell cars, trucks and automobiles parts globally. The company is one of the third largest global carmakers and it had the third highest sales of automobiles in 2014. The Company also provides automotive financing services through General Motors Financial Company, Inc. (GM Financial). The company designs, manufactures and markets vehicles under the brands of Buick, Cadillac, Chevrolet and GMC.

Source: Google Finance

Interesting Relationship Between Earnings and Share Price

The chart above shows how the shares of General Motors have traded in the last one year.  The shares of the company fell in July 2014 after the company posted unimpressive second quarter results as shown in the red arrow. Subsequently, the stock started another ascent after the decent third quarter earnings and the impressive fourth quarter earnings, which sent the stock to a new 52-week high of $38.99. Hence, it is obvious that there is a direct relationship between how shares of General Motors are traded and the quality of its earnings.

General Motors is set to release its first quarter (Q1 2015) results on April 23, I am optimistic that General Motors will deliver an impressive quarterly result that will send the stock soaring to new highs.  For instance, General Motors has consistently beaten EPS estimates in the last quarters with the most recent outperformance showing a 40% earnings beat.  Analysts are rooting for General Motors to deliver EPS of $0.96 to mark a whopping 230.69% year-over-year increase from EPS of $0.29 from the same quarter last year.

More interesting is the fact that General Motors has a Zacks Rack of Number 1 “Strong Buy” and Zacks Style Scores of “A” on Growth, “A” on Value and “B” on Momentum.

Why General Motors Will Surprise in the First Quarter

U.S. automakers recently provided sales numbers for auto sales in March and General Motors seems to be making an impressive comeback in the industry. Data from the auto industry shows that General Motors recorded a 2.4% decline in sales between March 2014 and March 2015. However, General Motors seems to be faring better than Ford Motors, which reported an annual decline of 3.4% in annual sales over the same period. The best part is that General Motor’s YTD car sales figures show a healthy growth pattern as the company recorded a 5.3% Year-to-Date increase in sales from 649,637 vehicles to 684,039 vehicles.

Nonetheless, I am most impressed with the fact that General Motors actually reported an increase in prices. The average price of U.S. cars have moved up 3.5%  and U.S car makers have been recording better margins on the improved market conditions. In fact, General Motors reported a 5.9% increase in average selling price to $37,170 as more people buy SUV’s and pickups because of the drop in global oil prices.

Hence, any revenue that General Motors might have lost in volume sales is practically being recovered in the price increase. I posit that General Motors will post an impressive top and bottom line results in the first quarter and that its share price will rise on the strength of the news.

How to Trade GM Options

I am optimistic about the prospects of General Motors, the stock should rise after the first quarter earnings are released, and I recommend buying GM call options. You should consider buying the GM Sep 2015 39.000 call (GM150918C00039000) at an asking price of $1.10 as soon as the market opens.

 

— Daily Option Alerts

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