New Jeep vehicles are parked on the lot of a Dodge Chrysler-Jeep Ram dealership on October 3, 2023 in Miami, Florida.
Joe Raedle | Getty Images News | Getty Images
The U.S. market, a profit engine for most automakers, is normalizing after years of record prices, low vehicle inventories and resilient demand. Inventories, especially for Detroit automakers, are rising and vehicle prices are slowly falling.
Wall Street has been expecting such a set of circumstances for some time, with the cyclical nature of the auto industry heralding a period of slowdown.
See the table…
Ford, GM and Stellantis stocks
“Investors who think autos can outperform on the back of higher earnings and share buybacks should think again. Auto fundamentals could be peaking (see rising incentives and defaults). Ultimately, this could catalyze a decline in spending and M&A,” Morgan Stanley analyst Adam Jonas said in a note to investors Friday.
Jonas’ comments come after the company last week downgraded GM’s rating from overweight to equal weight, adding that “automotive remains one of the most challenging industries in the world in terms of competition, overcapacity, cyclical and secular risks.”
The industry’s challenges are compounded by individual automakers’ problems and the uncertainty surrounding the adoption of all-electric vehicles, in which automakers have invested billions of dollars and which remain largely unprofitable.
Ford shares had their worst week since March 2020, falling 20% to close Friday at $11.19. GM lost 8.7% last week to $44.12. Stellantis fell 12.6% last week to $17.66.
For General Motors, investors have been wary of declines in its growing business, diminishing upside potential in the second half of the year and concerns that the automaker’s earnings power has peaked, Wall Street analysts said.
Selling more electric vehicles is one reason GM, which has raised its full-year financial forecast twice this year, expects the second half to underperform the first. The company expects its second-half adjusted profit to be between $4.7 billion and $6.7 billion, or $3.82 billion to $4.82 per adjusted share. That compares with $8.3 billion, or $5.68 per adjusted share, in the first half of the year.
The automaker also plans to cut vehicle prices by 1 to 1.5 percent and add $1 billion in spending, including $400 million in additional marketing costs to support vehicle launches. GM is looking to ramp up production of loss-making electric vehicles as it aims to make those vehicles profitable on a production, or contribution margin, basis by the end of the year.
Analysts are also concerned about GM’s continued losses in China, which has historically been a profit driver for the company. The automaker’s Chinese operations posted a loss of $104 million, the unit’s second straight quarterly loss after hitting a roughly 20-year low in 2023.
“We have taken steps to reduce inventories, align production with demand, protect our prices and reduce fixed costs. But it is clear that the actions we have taken, while important, have not been enough,” GM CEO Mary Barra said Tuesday during the company’s earnings call. “We expect the remainder of the year to remain challenging.”
The carmaker is expected to post further strong results in the second half of the year, build on its strong cash position and conduct multi-billion share buybacks to return money to investors.
The same cannot be said unilaterally of GM’s closest rival, Ford, which has opposed any share buybacks, preferring to rely on the company’s dividend to reward investors.
Several Wall Street analysts noted the difference in share buybacks between the companies, citing the Ford family’s voting control of the board and the special shares.
“Given the high cash balance, there was hope for a special dividend or even a share buyback. In retrospect, it was probably just investor pressure over GM’s policy. But Ford doesn’t seem ready to budge,” UBS analyst Joseph Spak said in a note to investors on Thursday.
The new Ford F-150 truck rolls through the assembly line at the Ford Dearborn Plant on April 11, 2024 in Dearborn, Michigan.
Bill Pugliano | Getty Images
Ford expects its adjusted profit in the second half of the year to be between $2 billion and $3 billion, compared with $5.5 billion in the first half of the year.
The company reaffirmed its 2024 guidance, despite second-quarter adjusted earnings per share falling 21 cents short of expectations. The automaker reported $800 million in additional unanticipated warranty costs compared with the previous quarter.
In delivering its second-half results, Ford Chief Financial Officer John Lawler revised the company’s guidance for the final six months of the year for its traditional Ford Blue and Ford Pro businesses. Full-year EBIT guidance is up for Ford Pro, to a range of $9 billion to $10 billion, driven by continued growth and a 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 higher warranty costs.
“We are capital disciplined, have the right product portfolio and generate consistent cash to reward our shareholders,” Lawler told investors Wednesday. “We are relentlessly looking for new ways to improve our business and remain focused on improving quality and costs.”
Transatlantic automaker Stellantis is facing arguably the most challenging second half of the year, particularly in its U.S. operations.
Speaking to the media, Stellantis CEO Carlos Tavares said many of the company’s problems stem from its U.S. operations, which he said were affected by “arrogant mistakes” regarding vehicle inventory levels, manufacturing and sales strategies.
Last year, Stellantis was the only major U.S. automaker to report a decline in sales compared to 2022.
In the first half of this year, the company’s sales in the United States fell by about 16%. Its market share in North America stood at 8.2%, down 1.8 percentage points.
Stellantis CEO Carlos Tavares holds a press conference before visiting the carmaker’s Sevel plant, Europe’s largest van manufacturing facility, in Atessa, Italy, January 23, 2024.
Remo Casilli | Reuters
Despite the ongoing challenges, Stellantis reaffirmed its 2024 guidance of a double-digit adjusted operating margin, positive industrial free cash flow and at least €7.7 billion ($8.3 billion) in capital returns to investors in the form of dividends and share buybacks.
In the first half, Stellantis’ adjusted operating margin stood at 10%. Its free cash flow stood at -392 million euros and its return on capital at 6.65 billion euros.
Tavares hopes to achieve those goals by launching 20 new models this year, correcting problems in the United States and further price cuts to boost sales. He also did not rule out further job cuts.
“It’s a very tough industry, a very tough time and everyone has to fight to get good results,” Tavares said. “We’re going to have to work hard to get there.”
– CNBC Michael Bloom contributed to this report.