GM Stock Is Rallying Into Earnings. Why They Better Be Good.

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General Motors

is reporting numbers Wednesday morning. Anything less than a beat- and-raise quarter won’t be enough to get GM stock moving again.

General Motors

(ticker: GM) stock is up about 38% year to date, better than the comparable gains in the

S&P 500

and

Dow Jones Industrial Average.

But shares haven’t done much since the company reported its first-quarter numbers on May 5, falling about 1% while the market rallied about 5%.

The price has been stuck even though the company, essentially, raised its financial forecasts, which is usually a positive for any stock. But interpreting guidance from car companies has been difficult in 2021, and the limits on output resulting from the global semiconductor shortage have made the outlook harder to understand.

Back in May, General Motors told investors to expect $10 to $11 billion in full-year operating earnings. The company earned about $4.4 billion in operating profit in the first quarter.

Then on June 16, GM said it expected to earn $8.5 billion to $9.5 billion in the first half of 2021, partly because the semiconductor shortage wasn’t as bad as feared. A first-half profit of up to $9.5 billion would leave just $1.5 billion for GM to earn in the second half of the year if it was to meet its full-year forecast for up to $11 billion in earnings.

No one expects that to happen. Wall Street is already looking for about $14 billion in 2021 operating earnings. That is comprised of $7.8 billion in the first half–a figure lower than management has predicted, perhaps because analysts haven’t updated their forecasts–and $6.2 billion in the second half.

If management still expects to deliver on its call for earnings of $9 billion in the first half, and analysts’ expectation for second-half profits of $6.2 billion is correct, full-year earnings would be $15.2 billion. The updated full-year guidance GM will release on Wednesday would have to be higher than that to lift the stock.

Expectations for GM’s results are also on the rise because of peers’ earnings. Despite the chip shortage,

Ford Motor

(F) and

Tesla

(TSLA) second-quarter results, reported this past week, were better than expected. Ford stock rose 0.9% the week it reported earnings. Tesla shares added 6.8% and rose 3.3% on Monday.

General Motors management has scheduled a conference call for 10 a.m. Eastern time on Wednesday to discuss the results. Investors and analysts are almost certain to ask about the shortage. Vehicle pricing, which has been strong partly because lower production has reduced dealers’ inventories, will be another topic of discussion.

If the chip shortage is easing, allowing car makers to produce more vehicles, weaker prices might be a headwind for the stock. But 2021 is an odd year.

RBC analyst Joe Spak says that auto makers’ shares typically struggle when prices fall. GM is his favorite stock in the industry for the balance of the year. Pricing is uniquely high, he noted, and dealers’ inventories are expected to remain low into 2022.

More announcements from GM about what electric vehicles it has in the pipeline could give shares a lift, he said. He rates the shares at Buy and has a $77 price target for the stock. Shares were up 1.5% at $57.90 on Tuesday.

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