The disappointing March auto sales gave another chance for pessimists to argue that the US auto market has peaked. The selloff that followed pushed the stock of General Motors Co. (NYSE: GM) to $33.97 yesterday. The PE ratio of 5.65, PB ratio of 1.65, and a debt/equity ratio of a mere 4.98 makes the stock look very attractive. However, considering the details below, it will not be hard to see that the stock will be under considerable pressure in the near future.
The Michigan-based company has entered into an agreement to sell the Opel Group to Peugeot. This leaves General Motors with just two major markets, namely, the US and China. Last year, GM sold 3.63 million and 3.91 million automobiles in the US and China, respectively. However, the investors are concerned by a decline in the US market share to 17% in 2016, from 17.3% in the previous year. In China, the market share has declined to 13.8% in 2016, from 14.9% in 2015.
General Motors stated that in China, the company sold 345,448 vehicles in March 2017, up 16% from the same period last year. The company also claimed that it is the best ever March sales. However, it should be noted that first-quarter sales declined by 5.2% on a y-o-y basis. In 2017, the Chinese government rolled back a portion of the tax cut for vehicles with an engine size smaller than 1.6 liters. The increase in tax rate caused a lower than expected sales growth. The tax rate, which increased to 7.5%, from the prior 5%, is slated to reach 10% in 2018. Going forward, analysts are worried that the sales would decline further when the tax rate gets normalized.
In January, vehicle sales fell by 24% y-o-y, while it grew by a mere 0.4% in February. Even the record sales in March were unable to offset the decline in the previous two months.
GM reported an overall increase of 1.6% y-o-y in March deliveries. However, it was below analysts’ estimates of 7% growth. Notably, IHS Markit has predicted that automobile sales in the US would decline slightly to 17.4 million units in 2017, from 17.5 million units in 2016. This raises investors’ fear of a downturn in the automobile sales cycle. Considering the weakness seen in the market, analysts expect GM to report FY17 earnings below guidance. Thus, we anticipate the stock of GM to remain bearish as of now.
Technically, the stock is facing resistance at 34.20. The negative reading of the MACD histogram also indicates a further downside to the stock. The stock is also trading below the 50-day moving average. Thus, we can expect the stock to lose value in the coming days.
A binary trader can bet on a downtrend by investing in a put option. The contract should be valid for at least one week and the investment should be preferably made when the stock trades near $33.90 on the NYSE.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
