New Jeep vehicles sit on a Dodge Chrysler-Jeep Ram dealership’s lot on October 03, 2023 in Miami, Florida.
Joe Raedle | Getty Images News | Getty Images
DETROIT – The last time shares of Ford Motor dropped by more than 18% in a day, as they did last week, the U.S. automotive industry was on the brink of bankruptcy during the Great Recession.
Ford, which avoided bankruptcy in 2008-2009, is far from any sort of such disaster, but the freefall in shares after the company missed Wall Street’s earnings expectations is the leading example of the uphill battle automakers face for the remainder of the year.
The U.S. market – a profit engine for most automakers – is normalizing after years of record high prices, low vehicle inventories and resilient demand. Inventories, especially for the Detroit automakers, are rising, and vehicle pricing is slowly declining.
Wall Street has been waiting for that set of circumstances for some time, with the cyclical nature of the auto industry ushering in a down period.
Ford, GM and Stellantis shares
“Investors who think autos can outperform on + earnings beats and buybacks should think again. Auto fundamentals may be peaking (see rising incentives and delinquencies). Eventually this can catalyze lower spending and” mergers and acquisitions, Morgan Stanley analyst Adam Jonas said Friday in an investor note.
Jonas’ comments came after the firm downgraded GM from overweight to equal weight this week, adding “auto remains one of the more challenged industries in the world in terms of competition, excess capacity, cyclical and secular risks.”
The industry challenges add to individual issues for each automaker as well as uncertainty around the adoption of all-electric vehicles, which automakers have invested billions of dollars in and which largely remain unprofitable.
Shares of Ford had their worst week since March 2020, down 20% to close Friday at $11.19. GM was down 8.7% last week to $44.12. Stellantis was down 12.6% last week to $17.66.
GM
For GM, investors balked at pullbacks in growth businesses, waning upside during the second half of the year, and fear that the automaker’s earnings power has peaked, according to Wall Street analysts.
Selling more EVs is one reason that GM, which has raised its annual financial guidance twice this year, expects the second half to underperform the first. The company expects its adjusted second-half earnings to be between $4.7 billion and $6.7 billion, or $3.82 and $4.82 adjusted per share. That compares to $8.3 billion, or $5.68 adjusted earnings per share, through the first half of the year.
The automaker also forecasts a 1% to 1.5% decline in vehicle pricing as well as $1 billion in additional expenses — including $400 million in additional marketing costs to support vehicle launches. GM is looking to increase production of money-losing EVs, as it aims to make the vehicles profitable on a production, or contribution-margin basis, by the end of the year.
Analysts also have concerns regarding GM’s continued losses in China, which has historically been a profit engine for the company. The automaker’s Chinese operations posted an equity loss of $104 million – the unit’s second consecutive quarterly loss after hitting a roughly 20-year low in 2023.
“We have been taking steps to reduce our inventories, align our production to demand, protect our pricing, and reduce fixed costs. But it’s clear the steps we have taken, while significant, have not been enough,” GM CEO Mary Barra said Tuesday during the company’s earnings call. “We expect the rest of the year will remain challenging.”
The automaker is still expected to post strong results during the second half of the year, build upon its strong cash flow position and conduct billions in share repurchases to return money to investors.
Ford
The same can’t be said unilaterally for GM’s closest crosstown rival Ford, which pushed back against any share repurchasing, instead relying on the company’s dividend to award investors.
Several Wall Street analysts noted the share repurchase difference between the companies, citing the Ford family’s voting control of the board and special shares.
“Given elevated cash balance, there had been hope for a special dividend or even a buyback. In hindsight, this was probably just investor pressure in comparison to GM’s policy. But, Ford doesn’t seem like they will budge off their stance,” UBS analyst Joseph Spak said Thursday in an investor note.
The new Ford F-150 truck goes through the assembly line at the Ford Dearborn Plant on April 11, 2024 in Dearborn, Michigan.
Bill Pugliano | Getty Images
Ford expects adjusted earnings during the second half of the year to be between $2 billion and $3 billion, down from $5.5 billion during the first half of the year.
The company reconfirmed its 2024 guidance despite coming in a whopping 21 cents below adjusted earnings per share expectations for the second quarter. The automaker reported an additional $800 million in unexpected warranty costs compared with the prior quarter.
To achieve its second-half results, Ford CFO John Lawler altered the company’s guidance for the last six months of the year for its traditional Ford Blue and commercial Ford Pro operations. Expectations for full-year EBIT are up for Ford Pro, to a range of $9 billion to $10 billion, on further growth and favorable product mix. Guidance is down, however, for the company’s Ford Blue segment, to a range of $6 billion to $6.5 billion, reflecting the higher warranty costs.
“We’re disciplined with capital, and we have the right portfolio of products and we are delivering consistent cash generation to reward our shareholders,” Lawler told investors Wednesday. “We are relentlessly seeking out new ways to make our business better and remain focused on driving improvements in both quality and cost.”
Stellantis
Transatlantic automaker Stellantis arguably faces the most challenging second half of the year, particularly regarding its U.S. operations.
Speaking to the media, Stellantis CEO Carlos Tavares said that many of the firm’s problems stem from its U.S. operations, which he previously said were being impacted by “arrogant mistakes” around vehicle inventory levels, manufacturing and sales strategies.
Last year, Stellantis was the only major automaker in the U.S. to report a decline in sales compared with 2022.
During the first half of this year, the firm’s U.S. sales were down about 16%. Its North American market share was 8.2%, down 1.8 percentage points.
Stellantis CEO Carlos Tavares holds a press conference ahead of visiting the Sevel automaker’s plant, Europe’s largest van-making facility, in Atessa, Italy, January 23, 2024.
Remo Casilli | Reuters
Despite the ongoing problems, Stellantis reconfirmed its 2024 guidance for double-digit adjusted operating income margin, positive industrial free cash flow and at least 7.7 billion euros in capital return to investors in the forms of dividends and buybacks.
Through the first half of the year, Stellantis’ adjusted operating margin was 10%. Its free cash flow was negative 392 million euros and its capital return was 6.65 billion euros.
Tavares expects to be able to achieve those targets with the help of 20 new model launches this year, correcting the problems in the U.S. and additional price cuts to increase sales. He also did not rule out additional job cuts.
“This is a very tough industry, a very tough period and everybody has to fight for performance,” Tavares said. “We will have to work hard to deliver that performance.”
– CNBC’s Michael Bloom contributed to this report.
