GM Traders Most Bearish Ever Versus Ford on Rising Costs
General Motors Co. (GM) shares are having the worst start to a year since returning to the market after bankruptcy. Traders are bracing for bigger declines.
The cost of GM options, an indicator of demand for protection against losses in the stock, jumped to a record high versus Ford Motor Co., data compiled by Bloomberg show. Shares of the largest U.S. carmaker lost 7.5 percent since recalls began Feb. 13, wiping out about $4 billion in shareholder value.
Congress and the Justice Department are investigating why it took so long for GM to recall 2.59 million cars that may have faulty ignition switches after more than a decade of customer complaints. The company predicts it will take a $1.3 billion charge in the first quarter primarily for the cost of repairing the faulty vehicles. The probe has compounded troubles for Chief Executive Officer Mary Barra, who is already battling a drop in U.S. market share while losses continue in Europe.
“The recall issue is not over yet and it won’t go away in a day or week,” Randy Warren, who manages $100 million as chief investment officer of Warren Financial Service, said by phone from Exton, Pennsylvania, on April 8. “There may be more bad news coming out and you definitely want to be hedged for this. The reputation damage may impact some people’s buying habits right now and cause a dip in sales.”
Bearish puts were the four most-active contracts on GM yesterday, according to data compiled by Bloomberg. While the stock rose 1.9 percent to $32.55 yesterday, it’s still down 20 percent this year.
Tom Henderson, a spokesman for GM, and Ford’s Susan Krusel said they wouldn’t comment on the options trading.
Turmoil at GM has boosted options volume as investors look to insure stock holdings or speculate on future moves. A daily average of 129,000 contracts have changed hands in the past five days, about double the level from the past two years, data compiled by Bloomberg show.
GM’s implied volatility, used to gauge options prices, was 29.4 yesterday, compared with 14.6 for an exchange-traded fund tracking the Standard & Poor’s 500 Index, according to data compiled by Bloomberg on three-month options with exercise prices closest to the shares.
The measure at GM was 7.21 points higher than at Ford. (F) The gap widened to 7.96 on April 1, the most since GM’s New York trading debut in 2010, following its 2009 bankruptcy.
The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX (VIX), slid 2.6 percent to 15.69 at 10:05 a.m. in New York. Its European counterpart, the VStoxx Index, lost 1.4 percent to 18.25.
The recall has taken a toll on GM’s earnings. The company’s profit is forecast to drop 43 percent during the first quarter, the biggest decline in at least two years, according to analyst estimates compiled by Bloomberg. The options market is implying a one-day move of 3.1 percent following the report.
The shares are cheap relative to the overall market and its competitors. GM trades at 9.4 times projected earnings, compared with 11.8 for Ford, data compiled by Bloomberg show. The S&P 500 has a multiple of 15.6.
Barra, who apologized for the 13 deaths linked to the faulty switches, appeared before lawmakers to answer questions about the Detroit-based automaker’s slow response. GM faces at least 15 federal suits, as well as a U.S. Justice Department probe and further questions from Congress, the Federal Bureau of Investigation, the Transportation Department and lawyers the company hired to investigate itself.
GM said that it had put two engineers on paid leave for their roles in events leading up to the recalls.
Repairing GM’s reputation is not the only challenge facing Barra as the automaker struggles to stabilize earnings in markets outside the U.S. and China. The company said on Feb. 6 that its international operations unit excluding China lost about $200 million in the fourth quarter, compared with about $300 million in profit a year earlier. GM, which has lost more than $18 billion in Europe since 1999, predicted profit will be weaker in all of its markets this year outside the Americas.
As GM’s recall crisis continues, Ford prepares for its busiest year of new-model rollouts. The Dearborn, Michigan-based company said in December that it plans to release 23 new vehicles globally in 2014, more than double last year’s number.
Sentiment about GM has bottomed and traders should bet on a rebound as the carmaker has enough cash to reward shareholders, according to Robert Royle of Smith & Williamson Investment Management LLP.
GM has $38.3 billion of cash, current marketable securities and credit available, which it could use to increase its dividend or buy out the 16 percent of its shares held by its two largest investors, a union health-care trust and the Canadian government, Royle said.
“It feels like GM was very much erring on the side of caution, wanting to get all the bad news out there,” Royle said by phone from London on April 4. His firm, which manages about $24 billion, owns GM shares. “While there are worries over the short-term damage to the brand, sales are still strong and history shows carmakers will recover. There are also good reasons to be bullish on GM. It would be very positive if they were to buy out the two largest shareholders.”
The recall didn’t affect GM car sales in the U.S., which rose 4.1 percent in March, beating the 0.8 percent gain projected by analysts. GM no longer makes the Chevrolet Cobalt, Saturn Ion and other small cars that are the subject of the recall. Ford’s U.S. light-vehicle sales rose 3.3 percent last month, three times the increase analysts had predicted.
Ford’s new F-Series pickups may hurt GM’s profitability in a segment that accounts for more than half of its earnings, according to Morgan Stanley analysts led by Adam Jonas. The brokerage has an underweight rating on GM, similar to a sell recommendation. GM will also need to use its cash to increase investment before returning it to shareholders, Jonas said.
“There’s a lot of work to do,” Jonas wrote in a client note dated April 9. “Capex needs must increase -- the cash pile should not be earmarked for returning. We think the market has got it right on GM valuation and no longer see significant risk-adjusted upside.”
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