General Motors profit hit by Pound devaluation

During the fiscal 2016 fourth-quarter, General Motors Co. (NYSE: GM), the third largest automaker in the US, took a one-time charge of $100 million. The company also faced negative foreign-exchange impact of $300 million (Pound devaluation).

Still, the company reported quarterly earnings that beat analysts’ estimates. Furthermore, the fourth-quarter revenue was higher on a y-o-y basis, and surpassed the Wall Street consensus estimates.

However, the market discarded the results and pounded the stock mainly due to a rise in the inventory in the US.

We do not foresee any bullish reversal in the stock in the near-term future due to the reasons provided below.

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The Detroit, Michigan-based company reported fourth-quarter 2016 revenue of $43.91 billion, up from $39.60 billion in the fourth-quarter 2015, and higher than analysts’ estimates of $41.53 billion. During Q4-2016, General Motors reported a decline in the net income to $1.84 billion or $1.19 per share, from $6.27 billion or $3.92 per share in Q4-2015. During fourth-quarter 2015, the company recorded earnings of $4 billion from other items.

Excluding ignition switch recall charges, among others, the adjusted earnings for the latest quarter fell to $1.28 per share, from $1.39 per share in the similar period last year. The quarterly adjusted earnings were higher than Thomson Reuters’ consensus estimates of $1.17 per share.

Apart from the y-o-y decline in the earnings, there are also several other concerns for investors. At the end of 2016, the inventories of unsold vehicles in dealer showrooms have increased to 845,000. The Q4 adjusted profit margin from the North American segment has declined to 8.4%, from 10% a year earlier. The Chief Financial Officer Chuck Stevens stated that the company does not anticipate to break-even in Europe in 2017. He also opined that the European operations may need further restructuring to return to profits.

General Motors anticipate near flat revenue in fiscal 2017, compared with the prior year. The earnings per share are expected to be between $6 and $6.50. Notably, the lower end of the range is below the fiscal 2016 earnings of $6.12 per share. The rise in inventory and lower margin is expected to keep the stock range bound with negative bias in the short-term.

The historical price chart indicates that the stock has broken below the support level of 36. The declining stochastic oscillator underlines the probability of further erosion in the share price. So, a trader can anticipate the stock to move down and test the next major support at 33.

An investment in a put option contract would allow a trader to benefit from the probable downtrend of the stock of General Motors. An entry into the trade should be made when the stock trades above $35. The contract expiry date should be between 20th and 22nd of February.

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