General Motors Stock Sinks as Tariffs Hit Bottom Line

GM options bulls were active ahead of earnings

Jul 25, 2018 at 9:15 AM
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The shares of General Motors Company (NYSE:GM) are signaling a sharp drop at the open, after the Detroit automaker cut its full-year forecast -- citing rising costs associated with the Trump administration's tariffs. GM stock has been holding above key technical support in recent sessions, but is set to open today at its lowest level since late May.

For the second quarter, GM reported a second-quarter adjusted profit of $1.81 per share on $36.76 billion in revenue -- higher than analysts were expecting. However, the company also lowered its 2018 profit forecast to $6 per share from the previous estimate of per-share earnings of $6.30 to $6.60, due in part to "recent and significant increases in commodity costs."

While analysts have yet to weigh in on GM stock after earnings, the majority of those currently covering the shares are upbeat. Nine brokerages maintain a "buy" or better rating on General Motors, while six have a tepid "hold" recommendation. Plus, the average 12-month price target of $49.39 is a 25% premium to last night's close at $39.48 -- and sits at a post-bankruptcy peak.

Pre-earnings options traders were optimistic, too. The weekly 7/27 40-strike call saw one of the biggest increases in open interest over the past two weeks, with 10,545 contracts added. Data from the major options exchanges confirms mostly buy-to-open activity here, meaning speculators were betting on an end-of-week finish above the round $40.

Looking at the charts, GM stock sold off drastically after topping out at a mid-June peak of $45. Heading into today's trading, the shares had spent the month of July churning above support near $38.50 -- home to the equity's late-May highs and 80-day moving average. Should General Motors' pre-market price action play out, the $37.50 region could emerge as a floor, as it did in the second half of May.


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