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Earnings Preview: Checking In On The Automakers With Reports From Ford And GM Coming Up

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Earnings Preview: Checking In On The Automakers With Reports From Ford And GM Coming Up

This week brings results from the two of the main automakers in the U.S. Ford Motor Company (NYSE: F) reports after the closing bell on Wednesday, Apr. 25. General Motors Company (NYSE: GM) is slated to report before market open on Thursday, Apr. 26.

Both F and GM, as well as the rest of the auto industry, have started to face some headwinds from rising steel and aluminum costs in recent quarters. That has partially been driven by recently announced tariffs on imported steel and aluminum in the U.S., and sanctions on Russian companies, which include some of the world’s major metals producers. But metal prices had been recovering even before then.

Aluminum prices recently spiked to a 7-year high above $2400 per ton. They’ve since pulled back below $2300 per ton, although they’re still up about 18 percent over the past year. Steel prices are also up more than 21 percent over the past year.

On the other hand, there was some optimism for the sector after China’s President Xi Jinping said he would reduce the 25 percent tariffs on automobiles imported into China. Jinping also said he’d ease rules on automakers operating in China by 2022, which have traditionally been forced to form joint ventures with Chinese firms to operate in the country. Nothing concrete has emerged yet and some auto industry analysts have expressed skepticism until they start to see actions take place.                

Consider listening to upcoming earnings calls to see how management is viewing the tariff discussion, and whether or not they’re making any changes as a result of some of the recent news.

Ford Earnings and Options Activity

Since taking over as CEO in May 2017, Jim Hackett has announced a series of cost-cutting measures to improve the company’s profitability. Overall, the company is targeting a $14 billion reduction in costs by 2020. 

The company already released its Q1 sales results, which showed that it faced challenges across its main markets. U.S. sales dropped 2.9 percent, Europe sales fell 3.8 percent and sales in China dropped 19 percent on a year-over-year basis. Sales in the F-Series line of pickups were up 4.3 percent in the U.S. and Lincoln brand sales were up 10 percent in China, two areas of strength in the company’s sales results.

CFO Bob Shanks previously said he expects revenue in 2018 to be roughly in line with 2017, although he expects adjusted EPS to fall to a range of $1.45 to $1.70, down from $1.78 in 2017. He attributed the earnings decline to a combination of headwinds from commodity prices, rising interest rates and unfavorable foreign exchange rates, combined with the company’s plans for increased spending on initiatives like self-driving cars.

For Q1, F is expected to report adjusted EPS of $0.41, up from $0.39 in the prior-year quarter, on revenue of $37.1 billion, according to third-party consensus estimates. With the exception of Q2 2017, F’s earnings since Q1 2017 have been coming in right around $0.39 to $0.43. Revenue is projected to grow 1.6 percent year-over-year. 

ford-f-stock-chart-earnings-q1-2018.png
FORD IN 2018. So far this year, F has lagged the S&P 500 (SPX) as well as the broader auto industry and shares are down more than 12 percent year-to-date. When the company reports, investors might get an idea of how the company has been progressing with CEO Hackett’s cost-cutting measures. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Around the upcoming earnings release, options traders have priced in about a 3.3 percent stock move in either direction, according to the Market Maker Move indicator on the thinkorswim® platform. F’s implied volatility was at the 44th percentile as of this morning, pretty close to the middle of the road.

In short-term trading at the Apr. 27 weekly expiration, calls have been active at the 11 and 11.5 strike price, while puts have been active at the 11 strike. Trading has been heavier on the call side, with volume of 9,097 contracts at the 11-strike call and 6,265 contracts at the 11.5-strike call during yesterday’s session, compared to volume of 2,677 contracts at the 11-strike put, the highest on the put side.

At the May 4 weekly expiration, there was significantly higher open interest on the put side at the end of yesterday’s session, with 40,111 contracts open at the 10.5-strike put. The next closest strike was the 11.5-strike call, which had 4,510 contracts open. Further out at the May 18 monthly expiration, most of the activity has been concentrated at the 12 strike for both calls and puts.

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.

General Motors Earnings and Options Activity

Now that GM has exited its European business, which happened when it sold off Opel AG in Q3 2017, attention among analysts and investors has remained fixed on the company’s two largest markets, North America and China.

GM’s U.S. sales rose 4 percent year-over-year in Q1 and sales in China were up 8 percent compared to last year. Results in the U.S. were helped by strength in crossovers and SUVs, while results in China benefited from double-digit growth in Cadillac and Buick vehicles.

After exiting its European business, some analysts have speculated the company will take additional steps to exit less profitable lines of business and focus more on North America and China. In February, GM announced it would close its Gunsan plant in Korea, which will result in restructuring charges of up to $850 million recorded by the end of Q2 2018.

When it releases Q1 results on Thursday, GM is expected to report adjusted EPS of $1.22, down from $1.70 in the prior-year quarter, on revenue of $34.15 billion, according to third-party consensus estimates. 

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GM IN 2018. GM has also pulled back from recent highs and is down about 10 percent year-to-date. The stock bounced off of a recent low of $34.50, but still remains a way from its 2018 high of $45.52. Chart source: thinkorswim® by TD Ameritrade.  Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

Around GM’s upcoming earnings release, options traders have also priced in about a 3.3 percent stock move in either direction, according to the Market Maker Move indicator. Implied volatility was at the 60th percentile as of this morning, just a bit elevated.  

There hasn’t been a whole lot of activity at the Apr. 27 weekly options expiration. In recent trading, calls have been more active at the 39 and 40 strike prices, while puts have been more active at the 38 and 39 strikes. Further out at the May 20 monthly expiration, most of the recent trading has also been concentrated at the 39 and 40 strikes for calls, whereas puts have been more active at the 36 and 38 strikes.

What’s Coming Up

Next week, Tesla Inc. (NASDAQ: TSLA) reports earnings after market close on Wednesday, May 2, rounding out a stretch of results from the automakers. Some of the other notable reports next week include Apple Inc. (NASDAQ: AAPL), Pfizer Inc. (NYSE: PFE) and Alibaba Group Holding Ltd. (NYSE: BABA).

On top of earnings, both the European Central Bank and Bank of Japan are holding meetings at the end of this week, and the Fed will meet the following week on May 1-2. This string of central bank meetings could add to earnings volatility over the next few weeks. If you have time, check out today’s market update for a look at what else is going on.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

Posted-In: JJ Kinahan TD AmeritradeEarnings News Previews Options Markets Trading Ideas

 

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