General Motors Risk Is Very High In The Short Term

| About: General Motors (GM)

This is a short-term, urgent, opinion. I believe General Motors (NYSE:GM) has significant risk Friday when it reviews and discusses U.S. sales trends, or later in February when it discusses Q4 2012 earnings.

This stems from it being hard to believe that General Motors will be immune to the factors which affected Ford (NYSE:F) and recently led its stock to the slaughterhouse. Friday's call on General Motors is just about U.S. sales trends and thus slightly less dangerous than Ford's. This is so because while Ford also talked about pressure in U.S. margins, it also mentioned Europe and South America as trouble spots.

Still, as Ford claimed that older models giving way to new models was about to pressure pricing and margins, increased U.S. discounting activity won't just affect Ford. It will hit General Motors as well. And while General Motors is not to talk about foreign troubles just yet, investors might well generalize these problems to it as soon as they get an excuse.

Plus there are signs, for instance, in an increased U.S. inventory/sales ratio that's once again going higher and portending higher discounts and lower margins.

Also, there are clear signs that the situation is similar for Ford and GM in the U.S. market. This is borne by the fact that both Ford and GM are curtailing production in U.S. factories.

Ford and General Motors

Ford's punishment happened because of how it drove earnings estimates for 2014 from $1.83 per share down to $1.50 per share. $1.50 per share is lower than the then-prevailing 2013 estimates of $1.66 per share (which were also driven lower by $0.06 since then). Thus from a situation of expecting 10% earnings growth, investors had to go all the way to expecting stagnation or even a slight contraction for 2014.

General Motors stands on a rather similar spot right now, with investors expecting even stronger earnings growth for 2014. Present consensus is $3.40 per share for 2013 and $4.65 per share for 2014, implying 36% earnings growth. There's thus considerable room for disappointment if the trends hitting Ford also affect General Motors. While it would be hard for tomorrow's call to already convey the full brunt of any correction, this might well happen on February's Q4 earnings call. At this point these earnings expectations haven't moved much, even in light of the Ford news.

Given that Ford earnings estimates for 2014 fell by 18%, a similarly-sized impact on General Motors would bring estimates from $4.65 per share to $3.81 per share. This is the size of the earnings risk which the present scenario encompasses. As explained, at this point there has been no movement from analysts in spite of the industry being under the same effects, and indeed, in spite of General Motors taking the same measures to offset inventory buildup - that is, production stoppages in its U.S. factories. Since tomorrow's call verses on the U.S. market, there's already some risk in it, though the full brunt of estimate revisions might need a broader focus on worldwide demand, to consider the same troubles in Europe and South America mentioned by Ford.

Stocks diverged

Yet, while the situation seems similar on fundamental grounds, the stocks have diverged significantly since early December. This performance gap seems likely to be at least partially filled once the market recognizes the situation to be similar at both companies (Source: Yahoo Finance).


General Motors seems likely to be affected by the same factors which cut into Ford's share price. The market hasn't recognized the similarity of the problems right away, but there are signs that GM will show the same kind of margin troubles which hit Ford. This can happen as early as tomorrow, or during February's earnings release.

The signs indicating the troubles are similar include industry-wide inventories as well as production stoppages both at Ford and GM in their U.S. factories. The performance differential between the two shares is up to around 20% in the last month, and part of it will probably disappear in the next 1-2 months.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in GM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.