Option Trade 
General Motors Company (NYSE:GM) Calls 
Tuesday, 19th April, 2016

**OPTION TRADE: Buy the GM Sep 2016 30.000 call at approximately $2.40. Place a pre-determined sell at $5.00.

Note: No protective stop losses added -- but if you wish to do so make it $0.95.

by Ian Harvey

April 19, 2016

General Motors Company (NYSE: GM), the Detroit automaker, is scheduled to report its first-quarter results before the market opens on April 21st. The company is expected to post earnings of $1.03 per share, up from $0.86 per share.

Conditions remain good for the auto industry, even though sales growth has been stagnant in recent months. With improvements in the U.S. labor market, in conjunction with low interest rates, it is expected to result in another banner year for the industry. In 2015, the auto sector had a record year, with 17.5 million vehicles sold, up 5.7% from the previous year. This year, the sector is expected to enjoy another record year, with analysts forecasting around 17.7 million vehicle sales.

Low fuel prices should also help keep auto sales rising, albeit at a slow pace than in previous years.

GM has a ridiculously low P/E of 5.2, so there is plenty of upside potential following a strong report. The company has posted better than expected results each of the last three quarters, and it is expected that another solid report for the company’s first quarter is forthcoming.

Analysts are extremely bullish on the stock, setting an average price target of $37.87 on shares, which is 23.6% above its current trading price.

The stock is down 10.3% on the year.

General Motors Company has a 12-month low of $24.62 and a 12-month high of $37.45. The company has a market cap of $48.36 billion and a P/E ratio of 5.30. The firm has a 50-day moving average price of $30.77 and a 200-day moving average price of $32.27.

General Motors Company last posted its earnings results on Wednesday, February 3rd. The auto manufacturer reported $1.39 earnings per share for the quarter, beating the Thomson Reuters’ consensus estimate of $1.21 by $0.18. The firm earned $39.60 billion during the quarter, compared to analysts’ expectations of $38 billion. The firm’s revenue for the quarter was up .0% on a year-over-year basis.

During the same period in the previous year, the firm posted $1.19 earnings per share. On average, equities research analysts forecast that General Motors Company will post $5.46 earnings per share for the current fiscal year.

Why GM?

• Q1 2016 showed a rise in sales of 0.9% and while low, retail channel volume boosted to 5.9%. This is largely due to strong sales from Chevrolet and GMC brands - 6.8% and 12.8% retail sales growth respectively.

• GM also displays initiative for the longer term by gradually reducing its retail fleet business - a step in the right direction as it should help increase residual values and so boost sales. The net result of higher residual values means GM's models become a more attractive purchase in the long term due to higher resale value and it means the company can offer leases with lower monthly payments.

• On top of this, various models in the GM fleet are seeing record results, such as light trucks. GMC, for example, saw its best year in light truck sales since 2005 with several models growing by double digits. Even more encouraging is the new-generation Malibu Sedan which is seeing its best sales since 1980.

• On top of positive growth figures, GM has also taken effective steps to reduce costs. The most beneficial of these was to introduce a voluntary employee’s beneficiary association for the retiree health costs of United Auto workers, netting a saving of US$3bn a year.

• Alongside that major saving, GM North America has managed to bring its breakeven point down in line with the industry standard of around 10-11 million unit sales. Morningstar forecasts that normative demand for light cars in the US is around 16-18 million, and that when auto demand picks up in the coming years, GM North America will see excellent earnings growth.

• As well as keeping an eye on costs, GM is also keeping up with the pace of change and disruptive threats to traditional auto industries. This includes its 9% investment in startup Lyft, purchasing Sidecar, consolidating its legacy car sharing business, Maven, as well as booting its connectivity and data gathering via OnStar.

• The current CEO, Mary Berra, has instilled confidence and seems set to continue in the role for some time, which would bring some much needed continuity to the leadership.

General Motors Company has earned a “BBB-” credit rating from analysts at Morningstar. The research firm’s “BBB-” rating indicates that the company is a moderate default risk. They also gave their stock a four star rating.

Morningstar states that, "General Motors' car models are of the best quality and design in decades".

Additionally, the company's status as a leader in truck models combined with other highly competitive models and a lower cost base means that GM is starting to "realize the scale to match its size." As a result of this, Morningstar believes GM has excellent earnings potential due to its healthy North American unit where it now can focus on four brands instead of the original eight.

Morningstar has issued a strongly positive report of GM Motors holding their fair value estimate in place at $48, some 60% above the current market level.

Also, several other equities research analysts have recently commented on the company.

• JPMorgan Chase & Co. reiterated a “buy” rating on shares of General Motors Company in a research report on Saturday, February 6th.

• Morgan Stanley reiterated a “sell” rating on shares of General Motors Company in a research report on Thursday, January 14th.

• Stifel Nicolaus reiterated a “hold” rating on shares of General Motors Company in a research report on Wednesday, January 13th.

• Credit Suisse reiterated an “outperform” rating and set a $38.00 price target on shares of General Motors Company in a research report on Wednesday, February 24th.

One research analyst has rated the stock with a sell rating, eight have issued a hold rating, nine have issued a buy rating and one has given a strong buy rating to the company’s stock. General Motors Company has an average rating of “Buy” and a consensus price target of $37.87.

Harvey’s Options Volatility Indicator


General Motors is showing signs of continued improvement. Automakers benefited from strong US sales in March and are set to smash 2015 records. General Motors is no exception.

Even so, most company analysts expect a slow decline in the industry until 2020. However, GM has managed to deliver positive results in many areas which are particularly encouraging since coming back from the brink of bankruptcy in 2010. This has seen the stock outperform its peers throughout 2015 and the beginning of 2016.

General Motors is poised for upside in 2016 and this momentum will be boosted further by the drop in gas prices across the board.

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

**OPTION TRADE: Buy the GM Sep 2016 30.000 call at approximately $2.40. Place a pre-determined sell at $5.00.

Note: No protective stop losses added -- but if you wish to do so make it $0.95.

”Success is simple. Do what's right, the right way, at the right time.”

Option Tip for your Success!
Options traders are not successful because they win.
Options traders win because they are successful.

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