A potential serious recession on the horizon has some analysts worried about shares of major automakers. Ford and General Motors both received downgrades on Monday, despite rising third-quarter sales. Ford stock and GM stock both continued to slide Tuesday morning after tumbling on Monday.
GM stock dropped more than 1.5% in the first hour of the trading day after losing 3.9% on Monday. While F stock edged down about 0.5% after it fell more than 6.8% on Monday.
UBS analyst Patrick Hummel says the overall sector outlook for 2023 is "deteriorating so fast that demand destruction seems inevitable." He expects a shift from under- to oversupply, which will lead to a price-and-mix led drop in margins.
Hummel predicts GM's earnings will more than halve next year and that the "rapidly deteriorating top-down picture" makes it unlikely the stock will rise over the next six to 12 months. Hummel downgraded GM stock to neutral from buy and cut his price target to $38 from $56.
He has a much more negative view of Ford. Hummel says Ford ranks behind General Motors and Stellantis in terms of North American EBIT — earnings before interest and taxes — margins, and "in light of the (fact the) likely recession has the highest risk of break-even points." He sees the company's EBIT margin halving year over year to 3.6% and free-cash flow falling around the break-even level. Ford's European businesses could face losses against the worsening macro backdrop, which would set back its restructuring efforts. Ford has one of the least-attractive risk vs. reward profiles among Western automakers on a 12-month view, Hummel noted. He downgraded F stock to a sell rating, and lowered the price target to $10 from $13.
The stock downgrades come after Ford and General Motors reported increases in third quarter sales. Ford sales rose 15.9% to 464,674 vehicles, just below expectations of 473,595 vehicles. General Motors sold 555,580 in Q3, up 24% year over year, and beating expectations of 539,028. However, both saw quarter-over-quarter sales declines. Ford sold 483,688 vehicles in Q2, while GM sold 575,911 cars in the second quarter.
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