Ford already ‘bit the proverbial bullet’ ahead of earnings, but GM results could go either way

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Ford Motor Co.’s third-quarter earnings report shouldn’t be too dramatic since the company already warned about rising costs and inventory problems, but General Motors Co.’s report could be a different story as Wall Street analysts have boosted their estimates at a time of growing worries of weakening demand.

GM
GM,
+4.67%

is slated to report third-quarter results on Oct. 25, before the opening bell, while Ford
F,
+3.57%

is scheduled to report the next day, after the closing bell.

Ford is expected to report earnings per share of 27 cents a share, according to a FactSet survey of analysts, which is down from 51 cents a share in the same period a year ago. That’s also down from 39 cents a share at the end of September, and less than half of the 57 cents expected at the end of the second quarter.

Meanwhile, the FactSet EPS consensus for GM has slipped to $1.88 from $1.94 at the end of the third quarter, but has increased from $1.71 at the start of the quarter. A year ago, GM reported EPS of $1.52.

For revenue, the FactSet consensus for Ford is for $37.46 billion, up 5.0% from a year ago, and for GM is $42.09 billion, up 57.2%.

JPMorgan analyst Ryan Brinkman said in a note to clients Friday that there is “unlikely to be a great deal of mystery” to Ford’s numbers, given the auto maker’s pre-announcement last month, when it said supplies costs will be $1 billion more than expected due to inflation, and that up to about 45,000 vehicles will be parked due as parts were in short supply.

“We suspect that Ford may have bit the proverbial bullet in 3Q, perhaps thinking it could prove more advantageous to settle with suppliers now, including as supplier managements may have been keen to ink deals with their own quarterly reporting schedule in mind,” Brinkman wrote in a note to clients.

But for GM, Brinkman said “the degree to which GM beats or misses in 3Q may come down also to the timing of supplier agreements,” which he said is difficult to ascertain from the outside. He said, however, that he believes the fact that GM hasn’t also pre-announced could mean that it intends to spread supplier payments out over a longer period than Ford.

Meanwhile, Brinkman reiterated his overweight ratings on the stocks of both auto makers.

Ford’s stock has tumbled 41.3% year to date through Friday, while GM shares have sunk 40.3%. The Dow Jones Industrial Average
DJIA,
+2.47%

has slumped 14.5% this year and the S&P 500 index
SPX,
+2.37%

has dropped 21.3%.

He believes that while Ford’s reported numbers will likely be in line with consensus, how the stock reacts to results will probably hinge on management discussion about the relative sustainability into 2023 of the headwinds and tailwinds that caused the company to pre-announce.

For GM, Brinkman believes production tracked stronger than expected, which could boost results above the Wall Street consensus. He expects third-quarter EPS of $1.91.

But rather than how the companies performed in the third quarter, the real question for investors is what the companies will say about the outlook for the rest of this year and into next year as recession expectations increase.

While Brinkman said investor reactions over what Ford’s pre-announcement means for 2023 is probably overdone, UBS’s Patrick Hummel said recently that Ford’s warning was the “lightning” that precedes the “thunder.”

Hummel said that Ford’s execution in electric vehicles has been “solid,” and he likes that GM’s EV momentum, given a strong launch pipeline. But EVs aren’t the problem.

Hummel said he believes the outlook for the auto sector is “deteriorating fast” as a recession is now likely. Basically, “demand destruction seems inevitable at a time when supply is improving,” which doesn’t bode well for profits and inventory costs going forward.

“We believe this will likely lead to a paradigm shift from under- to oversupply, and consequently, a price-and-mix led drop in margins,” Hummel wrote.

Also read: Ford stock is now a ‘sell’ at UBS as an oversupply problem looms.

So investors should pay close attention to what Ford and GM say about 2022, and or if they provide a peak into 2023.

GM said in July, in its second-quarter report that it expects adjusted 2022 EPS of between $6.50 to $7.50. The FactSet consensus is in the lower half of that range, at $6.75.

Meanwhile, the 2022 FactSet EPS consensus for Ford was last $1.98, which is down from $2.03 at the end of September, but up from $1.93 at the end of the second quarter.

Other numbers to watch

For Ford, here are some other numbers to watch for:

  • Inventories. Ford reported inventories of $13.98 billion at the end of the second quarter, which was down slightly from $14.65 billion as of March 31, but that was up sharply from $12.07 as of Dec. 31. Ford also said in September that it expected to have about 40,000 to 45,000 vehicles in inventory at the end of the third quarter lacking certain parts.

  • The FactSet consensus for cash flow from operations is $1.52 billion, which is down from $2.9 billion reported in the second quarter.

  • Market share. In the second quarter, global market share was 5.3%, up 0.3 percentage points from a year ago, with North America market share up 2.5 percentage points to was 12.9%.

  • Ford said in September it expected third-quarter adjusted earnings before interest and taxes (EBIT) in the range of $1.4 billion and $1.7 billion.

For GM:

  • Inventories. GM reported automotive inventories of $16.86 billion at the end of the second quarter, which was well above inventories of $14.84 billion as of March 31, which in turn was up sharply from $12.99 billion as of Dec. 31.

  • GM said in July it expected 2022 adjusted EBIT of between $13.0 billion and $15.0 billion.

  • GM provided 2022 guidance for adjusted automotive free cash flow in July of between $7.0 billion and $9.0 billion.

  • GM said in July that it expects 2022 net income of between $9.6 billion and $11.2 billion.



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