29 July 2020

Will GM and Ford Speed Past Market Expectations?

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News shaping
the markets today

     

What’s happening: US auto majors are set to report their earnings this week, with General Motors and Ford Motor among the leading names in the list.

What happened: The pandemic had brought the automotive industry to a grinding halt, with companies being forced to shut down their factories. Automakers globally have not been able to roll out new models of their vehicles and have announced furloughs and layoffs to curtail costs.

General Motors is scheduled to release its earnings report before the opening bell today, while Ford Motor’s earnings will be out after the closing bell tomorrow. Investors are eager to know which of these two automakers faced the crisis better.

What are the estimates: Both major automakers are expected to report losses for the latest quarter, with a significant decline in revenues.

  • General Motors is expected to report a loss of $1.76 per share, versus a profit of $1.64 per share, in the same quarter last year. Analysts expect the company’s revenue to have contracted by 53.1% to $16.93 billion.
  • Ford is expected to report an adjusted loss of $1.17 per share, versus its year-ago profit of 28 cents per share. Sales are projected to decline to $19.4 billion, from last year’s $38.9 billion.

Why it matters: Results from these leading automakers come on the heels of another strong quarter reported by Tesla, which reported a surprise profit for its latest quarter. While investors have handsomely rewarded the shares for the phenomenal performance, one must not forget that the Elon Musk-led company caters to less than 1% of the global auto demand.

Auto production tumbled by 45% in the second quarter, Deutsche Bank analysts said in an industry note. Retail vehicle sales in the US made a strong rebound, almost reaching the pre-pandemic levels, only to plummet again with the resurgence of infections.

Earlier in June, GM had announced a 34% decline in quarterly sales. The company had added, however, that there was a significant rebound in retail sales in May and June.

Investors interested in GM’s stock will keep a close eye on cash burn during the quarter. The burn may be better than the estimated $7 billion to $9 billion due to the sales rebound in the last two months of the quarter.

On the other hand, Ford had not issued any cash burn guidance for the second quarter, after burning $2.2 billion in the first quarter. Management had said, however, that adjusted EBIT (earnings before taxes) could be in the red, with a loss of over $5 billion.

Ford announced an improvement in its China sales, while GM's sales slipped slightly in that key market. Ford, which re-launched its Bronco SUV this month, received a tremendous response from customers, resulting in an 18-month waiting list for the vehicle.

How shares performed so far: Ford’s shares have performed much better than GM’s stock over the past three months. While GM’s shares have gained around 19%, Ford’s stock has spiked more than 30% in the period.

What to watch: Both automakers are under severe pressure to announce upbeat comments, especially after the strong quarterly results from Tesla. Investors await details of the recent rebound in sales and expect the companies to reveal projections for the full year.

The Markets Today

     

Crude oil will be in focus today, ahead of the EIA’s (Energy Information Administration) report on crude stockpiles.

Context: Oil futures fell on Tuesday to their lowest close in over one week, as traders remained concerned about the energy-demand outlook with rising covid-19 cases, geopolitical tensions, and the US stimulus impasse.

Details: The market is bracing itself for a gush of oil supply from the OPEC+ (Organization of the Petroleum Exporting Countries and their allies). The group has supported oil prices with massive production cuts. The members had agreed, however, to relax their production cuts by 2 million bpd (barrels per day) starting August.

Oil prices have recently remained range-bound, as investors weigh the prospects for the global economy and resultant energy demand. The continued rise in coronavirus cases in the US, the resurgence of infections in Europe and China’s announcement of 101 new cases in the mainland (the highest in over three and a half months) have not boded well for a recovery in oil demand.

Meanwhile, the growing geopolitical tensions between the world’s two largest economies have kept oil prices volatile. Markets had been looking forward to additional stimulus by the US to lift economic growth. However, the Republicans have proposed a package of $1 trillion, which is a third of what investors had hoped for.

WTI (West Texas Intermediate) crude for September delivery dropped 1.4% to end at $41.04 per barrel on the NYMEX (New York Mercantile Exchange), after rising around 0.8% on Monday. The oil settlement price yesterday was the lowest since July 20.

September Brent crude fell 0.4% to settle at $43.22 per barrel on ICE Futures Europe, recording its lowest close since July 17.

In other commodities, August natural gas rose 3.8% to settle at $1.80 per million British thermal units, following a 4.1% decline on Monday. August gasoline slipped 0.7% to $1.2656 a gallon.

What to watch: Investors await the EIA’s report on crude oil stockpiles. Analysts expect the EIA to report a decline of 1.2 million barrels in crude supplies for the week ending July 24. Gasoline supplies are expected to decline 2 million barrels, while distillate supplies are likely to remain unchanged.

Markets will continue to monitor on the covid-19 numbers, with total cases in the US exceeding 4.3 million, with more than 1,000 deaths yesterday.

Other Markets: European indices were trading mostly higher at 8:30am GMT, with the FTSE 100 and French 40 index up by 0.1% and 0.5, respectively, while the Dax 30 index had lost 0.1%.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

What else to watch today

     

Saudi Arabia’s bank lending growth and money supply M3, UAE’s money supply M3, ECB’s non-monetary policy meeting as well as the US MBA mortgage applications, goods trade balance, wholesale inventories, pending home sales, and Fed’s interest rate decision.

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