New GM Trade Idea After $6 Billion Buyback Freeze Turns Heads

There had been some good news. Word had been passed around late on Monday that President Trump might be set to ease the impact of tariffs on imported auto parts for vehicles manufactured inside the U.S. 

The president had planned to head up to Michigan to make the announcement as he marked the culmination of his second first 100 days as America's chief executive. Both General Motors GM and Ford Motor F were trading higher overnight. The joy was short-lived. General Motors released the firm's first quarter financial results on Tuesday morning. This is that story.

For the three-month period ended March 31, GM posted an adjusted EPS of $2.78 (GAAP EPS: $3.35) on revenue of $44.02 billion. These numbers all beat Wall Street's expectations, while revenue generation was good enough for year-over-year growth of 2.3%. The downward adjustment to profitability was made primarily for returns related to the redemption of Cruise preferred shares from non-controlling interest holders.

The stock sold off ahead of the opening bell in New York. Certainly, the first quarter performance was fine. Actually, better than fine. The hiccup was in the firm's lack of confidence in its own guidance. 

In a call with reporters, CFO Paul Jacobson said, "We believe the future impacts of tariffs could be significant, so we are 'reassessing' our guidance and look forward to sharing more when we have greater clarity. The prior guidance can't be relied upon. and we'll come back to the market with clarity as soon as we have it."

Whoa!

Clearly unsettling to investors early on Tuesday morning were two items. 

General Motors postponed the post-earnings release conference call from Tuesday until this Thursday, May 1, at 08:30 a.m. ET. Additionally, the firm decided to freeze at least part of the $6 billion accelerated share repurchase program just announced this past February. The firm had stated that $2 billion of that $6 billion in planned repurchases was slated for the second quarter. That one-third portion of the planned buyback program will proceed to completion.

Operations

While revenue was growing 2.3% to $44.02 billion, costs and expenses increased 3.5% to $40.668 billion. This left GAAP operating income of $3.352 billion (-10.3%). After accounting for interest, taxes and other income and expenses, net income attributable to shareholders printed at $2.784 billion (-6.6%). However, net income attributable to common shareholders landed at $3.361 billion (+13.2%). This works out to $3.35 per fully-diluted common share (up from $2.56 a year ago), which is adjustable down to $2.78 (up from $2.62).

Fundamentals

For the period reported, GM generated automotive operating cash flow of $2.404 billion (-33.2%). Out of that came capex spending of $1.809 billion. Adding to that in some small measure were plant wind downs, restructuring actions and a Buick brand dealer strategy implementation. That put automotive free cash flow at $811 million (-25.6%). The firm repurchased $2.012 billion worth of common stock during the quarter, while also paying shareholders $175 million in cash dividends.

Glancing at the balance sheet, GM ended the quarter with a cash position of $27.489 billion and inventories of $15.253 billion. Along with receivables and other short-term assets, current assets printed at $110.006 billion at quarter's end. Current liabilities added up to $90.474 billion. This included no debt due to mature within 12 months, which is impressive. The firm's current and quick ratios now stand at 1.10 and 1.04, respectively. Really not bad at all for a large industrial operation.

Total assets amount to $282.104 billion including just $4.52 billion in goodwill and other intangibles. Again, impressive. Total liabilities less equity comes to $215.678 billion. This does include long-term debt of $96.744 billion, mostly attributable to GM Financial. The size of this long-term debt is the only item that I am not impressed by as I take in this balance sheet. The fact that this debt-load is up 7.1% over the past three months also has my attention.

My Thoughts

The suspended guidance could be temporary. That said, what had been issued could very well be taken down a couple of pegs. The frozen share repurchase program should hurt the stock. That said, one would think that if President Trump is headed to Michigan to make an announcement marking the first 100 days of this administration that he is likely going to come bearing gifts.

Readers already know that I have written on Ford Motor for my "Stocks Under $10" series. I am long that stock. I also like Ford more than GM from a risk/reward proposition. As I write, I am up almost 5% on that long position in Ford, which is only a couple of weeks old. Do I need more exposure to the U.S. auto sector? Obviously not.

That said, Tuesday morning's weakness in GM with likely upside (my opinion) catalysts later in the week (the president, the earnings call) does present what could be a short-term (intra-week) trading opportunity.

Yes, the stock has been mired in a downtrend for five months. In order to take advantage of this short-term opportunity, I am not likely to purchase equity. What I would like to do is get long a bull call spread at minimal expense in order to try to capture the space in between the 21-day EMA (where swing traders live) and the possible resistance that would appear at the 200-day SMA.

GM Trade Idea

• Purchase one May 2 GM $46 call for $1.15
• Sell (write) one May 2 GM $49 call for $0.25.

Net debit: $0.90

Note: The idea is to lay out a rough $0.90 to try to win back $3.00. I am not likely to go out on too many contracts. Just enough to participate if there is a small pop later this week.

At the time of publication, Guilfoyle was long F equity.