Is General Motors a Healthy Investment?

With shares of General Motors (NYSE:GM) trading around $37, is GM an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

General Motors designs, manufactures, and markets cars, crossovers, trucks, and automobile parts worldwide. The company markets its vehicles primarily under the Buick, Cadillac, Chevrolet, GMC, Opel, Holden, and Vauxhall brand names, as well as under the Alpheon, Jiefang, Baojun, and Wuling brand names. It sells cars and trucks to dealers for consumer retail sales, as well as to fleet customers in daily rental car companies, commercial fleet customers, leasing companies, and governments.

General Motors is in troubled waters after workers in its South Korea plant announced a strike related to salary and production volume issues. The company is already facing declining earnings in South Korea due to a stronger won. General Motors workers are paid in accordance to a wage scheme designed in 1953. However, workers are demanding a $110 rise in their monthly salary along with the plea for a one-time bonus. The bonus is decided according to the Supreme Court rule of fixed bonus issued last year. However, workers insist on a new contract with several statutory benefits including overtime allowances and severance pay, in proportion to base wages. South Korea is one of the largest manufacturing bases of General Motors in Asia.

The automaker produces nearly all Chevrolet vehicles in the country and exports them to Europe. General Motors Korea operates through four manufacturing plants in the country and an assembly plant in Vietnam. However, General Motors plans to stop selling the Chevrolet brand in Europe by the end of 2015. As a result, the Korean workers are also demanding for increased production in apprehension of retrenchment going forward. General Motors’ South Korea CEO Sergio Rocha had warned the employees of dire consequences if they go on strike. He feared reduced production as well as job security of the workers.

However, 69 percent of workers, totaling about 14,016, voted for the strike for the fourth consecutive year. Strikes in Korea are a common phenomenon and happen almost every year. However, the strike may continue longer than usual this year. General Motors, along with automakers like Hyundai Motor, is facing problems with the current wage system. Notably, a revision in the wage structure will lead to higher labor costs for the automakers.

T = Technicals on the Stock Chart are Mixed

General Motors stock has been moving higher in recent times. However, the stock is currently pulling back and may need time to stabilize. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, General Motors is trading above its rising key averages which signal neutral to bullish price action in the near-term.

GM

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of General Motors options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

General Motors Options

25.82%

90%

88%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on General Motors stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for General Motors look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-89.66%

5.56%

-49.44%

-16.67%

Revenue Growth (Y-O-Y)

1.44%

3.05%

3.72%

3.88%

Earnings Reaction

-0.63%

-0.02%

3.24%

-1.1%

General Motors has seen decreasing earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about General Motors recent earnings announcements.

P = Weak Relative Performance Versus Peers and Sector

How has General Motors stock done relative to its peers, Ford Motor (NYSE:F), Toyota Motor (NYSE:TM), Tesla Motors (NASDAQ:TSLA), and sector?

General Motors

Ford Motor

Toyota Motor

Tesla Motors

Sector

Year-to-Date Return

-7.09%

12.96%

-1.54%

48.28%

2.44%

General Motors has been a poor relative performer, year-to-date.

Conclusion

General Motors continues to change its business as it looks to entice companies and consumers with its new and improved vehicles. Workers in its South Korea plant announced a strike related to salary and production volume issues. The stock has been moving higher in recent times, but is currently pulling back. Over the last four quarters, earnings have been decreasing while revenues have been increasing, which has produced mixed feelings among investors. Relative to its peers and sector, General Motors has been a poor year-to-date performer. WAIT AND SEE what General Motors does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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