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Here’s What History Says About General Motors Company (GM) Ahead Of Earnings

While we usually profile companies with peculiarly consistent earnings histories, today we’re going to profile a giant with an inconsistent earnings history. General Motors Company (NYSE:GM) is expected to report earnings tomorrow morning before market open. Based on its earnings history, we see a strong probability of an earnings beat but a high chance of a miss on revenue estimates.

General Motors Earnings & Revenue Beat History

Wall St. Analysts are anticipating EPS of $1.09 and revenue of $40.20B from General Motors when they release tomorrow. Based on its earnings history, our quantitative model predicts a 55-65% probability that General Motors will beat these EPS estimates by a small (0-5%) amount, and a low (0-45%) chance of a revenue beat – i.e. an expected revenue miss. This is based on GM’s weak earnings day history, as illustrated below:

General Motors missed last quarter’s EPS consensus estimate by 11.34%, marking it’s fifth miss in the last ten quarters.

It also missed the revenue consensus estimates last quarter by 7.33%, marking GM’ssixth straight revenue miss:

The $40.20B revenue estimate represents a 1.3% year-over-year (YoY) revenue growth rate over the FQ2 2014 reported revenue of $39.65B. The image below shows GM’s YoY growth rates for revenue and EPS. As shown below, revenue growth has been flat for the last eight quarters while the EPS growth rate has accelerated over the last year.

Considering that revenue growth has been in decline since FQ2 2013, and has been negative for the past 2 quarters, +1.3% revenue growth seems overly optimistic. The projected EPS of $1.09 would represent YoY earnings growth of 88%. While this is a huge number, it is right in line with the YoY earnings growth rates of the last two quarters of 77.61% and 196.55%.

While we anticipate a likely revenue miss, the potential upside from an EPS beat is attractive for a value stock like General Motors. Cheap value stocks increase in price by a larger margin than expensive stocks after beating earnings estimates (e.g., Zhao 2009). Thus, it is important to consider GM’s value profile to see if an EPS beat will lead to gains for shareholders. Below is GM’s value profile relative to both the market and the automobiles group on 5 key value metrics:

It’s quite clear that General Motors is trading at an attractive entry price for investors looking to take a long-term position in the company. General Motors ranks near the top ten percent of the market based on sales, earnings, and free cash flow yields. It also offers an attractive 4.74% dividend yield, ranking near the top fifteen percent of the market in the metric. General Motors also has the most attractive value profile of the entire automobiles group.

From a technical standpoint, General Motors is trading below its 20, 50, and 200-day moving averages and is trading far below its 52-week high. The stock is clearly trending downwards, having lost 15.8% of its market cap in the last 20 trading days. This has helped its valuation profile, which presents an opportunity for longer-term buy-and-hold investors. A huge EPS beat and relatively strong revenue release would reverse the current downtrend, and likely lead to a significant gain in stock price. While we’re confident that GM will beat EPS expectations, we’re equally confident  that they will miss revenue as well.

General Motors has only gained on earnings day twice in the last 6 quarters, following the only two EPS beats of that period. It gained 5% from close-to-close after its 40% EPS beat in FQ4 2014, and gained 1.52% from close-to-close after its 2.11% EPS beat in FQ3 2014. It’s largest drop in price came the previous quarter, FQ2 2014, when it lost 4.45% from close-to-close following a 25.64% EPS miss. GM’s earnings day price moves are quite clearly dependent on its EPS performance relative to Wall St. expectations. Though we expect a large revenue miss, given its value profile there is a chance for significant upside should General Motors surprise EPS estimates tomorrow.

While we remain less bullish than Wall St. with our 12-month price target for General Motors, we still see significant, 20%, upside in the stock. We look forward to tomorrow’s earnings release to determine if the momentum changes now or further into the future.

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