GM's Earnings Won't Move the Stock. Chips Are the Real Focus. - Barron's

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General Motors has strung together more than 20 consecutive quarters in which earnings were better than expected.

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When General Motors reports its first-quarter numbers Wednesday morning, expect great results that won’t matter for the stock. Investors are focusing on the future, and what management says about two key topics will determine the direction of the share price for the next few months.

The latest results, of course, will still be worth noting. Wall Street is looking for $1.05 in per-share earnings from $32.2 billion in sales. But only a negative surprise would move General Motors (ticker: GM) stock. Options markets imply a move of 3% to 4% in the stock price, up or down, after the results are reported.

Good earnings are expected for three reasons. First, cars are flying off dealers’ lots. U.S. auto sales in April came in at an annualized rate of 18.5 million. That blew away expectations and was the highest level since 2005.

The second reason is that Ford Motor (F) turned in earnings that were far better than expected this past week. Production was constrained by the global semiconductor shortage, so Ford built and sold more higher-end vehicles that have better profit margins. If companies can’t meet internal output goals, they may as well make the highest-value products they can. GM probably took the same tack as Ford.

Third, GM itself is remarkably consistent in terms of its financial reports. It has strung together more than 20 consecutive quarters in which earnings were higher than expected.

Better-than-expected earnings, of course, don’t always translate into positive stock-price reactions. Roughly 80% of S&P 500 companies reporting first-quarter numbers, for instance, have beaten analysts’ estimates, but the average stock-price move following those disclosures is a loss of 0.1%.

But for GM, shares rise about 70% of the time the company reports better-than- expected earnings. The average move up is about 3%.

With earnings as an afterthought, the global semiconductor shortage will be a key issue for investors. This past week, Ford estimated it will lose 50% of its second-quarter production because of a lack of chips. That comes after Ford lost 17% of the output it had planned for the first quarter.

Automotive producers globally lost, perhaps, 10% of their planned total output for the first quarter because of the lack of chips. Ford appears to have done a little worse than average.

How GM is managing its chips problem will go a long way toward determining what the stock does in the second and third quarters of 2021. The chip problem is expected to get more severe in the second quarter, but if GM loses significantly less production than Ford, its stock could pop.

Shares are up more than 37% year to date, better than the comparable gains of the S&P 500 and Dow Jones Industrial Average. Still, they have dipped about 2% over the past week as investors have began to worry more about chips, a key issue for the rest of 2021.

Electric vehicles will matter more in the long run as the entire industry transitions away from gasoline-powered engines. GM has already communicated its plans to offer 30 new EVs by 2025. News about how effectively the company is working toward that goal will also move the stock.

Management will host a conference call at 10 a.m. Eastern on Wednesday to discuss the results.

Write to Al Root at allen.root@dowjones.com

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GM's Earnings Won't Move the Stock. Chips Are the Real Focus. - Barron's
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