Ford, GM, Stellantis face tough times in late 2024

Detroit – Last Stock Ford Motor Company Like last week, when it fell more than 18% in a single day, the U.S. auto industry was on the brink of bankruptcy at the height of the Great Recession.

Ford is far from such catastrophe, having avoided bankruptcy in 2008-2009, but the plunge in its stock price after missing Wall Street profit expectations is a prime example of the uphill battle the automaker faces for the rest of the year.

The U.S. market, a profit driver for most automakers, is normalizing after years of record high prices, low vehicle inventories and solid demand. Inventories are rising, especially at Detroit automakers, and vehicle prices are gradually falling.

Wall Street has been waiting for that to happen for a while, as the cyclical nature of the auto industry has led to downturns.

“Investors who believe the auto industry will perform well on better-than-expected earnings and share buybacks should think again. Auto industry fundamentals may be peaking (see rising incentives and delinquencies). Ultimately, this could be a catalyst for lower spending and mergers and acquisitions,” Morgan Stanley analyst Adam Jonas said in a note to investors on Friday.

Jonas’ comments came after the firm downgraded GM to equal weight from overweight last week, adding that “the auto industry remains one of the most challenging in the world in terms of competition, overcapacity and cyclical and secular risks.”

The industry challenges include individual issues for individual automakers, as well as growing uncertainty over the rollout of all-electric vehicles, in which automakers have invested billions of dollars but have made little profit.

Ford shares suffered their worst week since March 2020, dropping 20% ​​to close at $11.19 on Friday. GM fell 8.7% last week to $44.12. Stellantis fell 12.6% last week to $17.66.

for General MotorsWall Street analysts say investors are spooked by a slowdown in growth businesses, limited upside potential in the second half of the year and concerns that automakers’ profitability has peaked.

Rising EV sales are one of the reasons GM, which has raised its full-year financial outlook twice this year, expects its second-half results to be weaker than the first. The company now expects second-half adjusted earnings of $4.7 billion to $6.7 billion, or $3.82 to $4.82 a share, compared with adjusted earnings of $8.3 billion, or $5.68 a share, in the first half of the year.

The company also expects vehicle prices to fall 1% to 1.5% and incur additional expenses of $1 billion, including $400 million in additional marketing costs, to support new vehicle launches. GM is aiming to increase loss-making EV production and make EVs profitable on a production volume, or contribution margin, basis by the end of the year.

Analysts are also concerned about continued losses in China, historically a source of profit for GM. GM’s China operations posted a $104 million equity loss, its second consecutive quarterly loss since hitting a nearly two-decade low in 2023.

“We have taken steps to reduce inventory, align production with demand, support prices and reduce fixed costs. However, it is clear that the steps we have taken, while important, were not enough,” GM CEO Mary Barra said during the company’s earnings call on Tuesday. “We expect conditions to remain challenging for the remainder of the year.”

The automaker is expected to report further strong earnings in the second half of the year, build a strong cash flow base and use billions of dollars in share buybacks to return capital to investors.

The same can’t be said for GM’s closest rival, Ford, which eschews stock buybacks and instead relies on dividends to reward investors.

Several Wall Street analysts pointed to differences in buybacks between the two companies, citing the Ford family’s control of the board and voting power of special stock.

“Given its high cash balance, there was also the expectation of a special dividend or share buyback. In hindsight, this was probably more investor pressure than GM’s approach, but Ford doesn’t appear to plan on changing its stance,” UBS analyst Joseph Spack said in a note to investors on Thursday.

Ford now sees adjusted earnings of $2 billion to $3 billion in the second half of the year, down from $5.5 billion in the first half.

The company reaffirmed its 2024 guidance even as second-quarter adjusted earnings per share fell 21 cents short of expectations. The company reported an $800 million increase in unexpected warranty expenses compared to the previous quarter.

Ford CFO John Lawler revised his outlook for the second half of the year for its legacy Ford Blue and commercial Ford Pro businesses on track to deliver results in the second half. Full-year EBIT expectations for the Ford Pro business have been raised to a range of $9 billion to $10 billion on further growth and favorable product mix, while guidance for the Ford Blue division has been lowered to a range of $6 billion to $6.5 billion to reflect higher warranty costs.

“We have tight capital management, the right product portfolio and are delivering consistent cash generation to reward shareholders,” Lawler told investors on Wednesday. “We are constantly looking at new ways to make our business better and remain focused on driving improvements in both quality and cost.”

Transatlantic automaker Stellantis arguably faces the toughest times in the second half of the year, particularly for its US operations.

Stellantis CEO Carlos Tavares has previously told media that many of the company’s problems stem from its U.S. operations, affected by “mistakes of hubris” regarding vehicle inventory levels, manufacturing and sales strategy.

Last year, Stellantis was the only major U.S. automaker to report a sales decline compared to 2022.

In the first half of the year, the company’s U.S. sales fell about 16%. Its North American market share fell 1.8 percentage points to 8.2%.

Despite the continuing problems, Stellantis reaffirmed its guidance for double-digit adjusted operating margins in 2024, positive industrial free cash flow and returning capital to investors of at least 7.7 billion euros ($8.3 billion) in the form of dividends and share buybacks.

For the first half of the year, Stellantis’ adjusted operating margin was 10%. Free cash flow was minus €392 million and capital return was €6.65 billion.

Tavares said he expects to achieve those goals by launching 20 new models this year, ironing out problems in the U.S. and making further price cuts to boost sales, and did not rule out further job cuts.

“This is a very tough industry, it’s a very tough time, and everybody has to fight for performance,” Tavares said. “You have to work hard to get that performance.”

–CNBC’s Michael Bloom contributed to this report.

Correction: Morgan Stanley downgraded GM to equal weight from overweight last week. An earlier version had the timing incorrect.