The recent drop in shares of Ford Motor is reminiscent of the challenges faced by the U.S. automotive industry during the Great Recession. While Ford managed to avoid bankruptcy during that time, the current freefall in shares highlights the uphill battle that automakers are facing in the current market. The U.S. market, which has been a profit engine for most automakers, is now normalizing after years of record-high prices and low vehicle inventories. This normalization has led to rising inventories, declining vehicle pricing, and increased competition.
According to Morgan Stanley analyst Adam Jonas, the cyclical nature of the auto industry is ushering in a down period. He warns that auto fundamentals may be peaking, pointing to rising incentives and delinquencies as indicators. These challenges are not unique to Ford, as General Motors (GM) and Stellantis also face similar issues. In fact, Morgan Stanley recently downgraded GM, stating that the auto industry is one of the most challenged industries in terms of competition, excess capacity, and cyclical and secular risks.
One of the major concerns for automakers is the adoption of all-electric vehicles (EVs). While automakers have invested billions of dollars in EVs, they have yet to become profitable. This, combined with the industry challenges, has led to a decline in share prices for Ford, GM, and Stellantis.
For GM, investors are concerned about pullbacks in growth businesses, waning upside in the second half of the year, and fear that the automaker’s earnings power has peaked. GM expects the second half of the year to underperform the first, citing the need to sell more EVs and increase production. However, analysts also have concerns about GM’s losses in China, which has historically been a profit engine for the company.
Ford, on the other hand, is pushing back against share repurchasing and instead relying on its dividend to reward investors. This has led to speculation about the differences in share repurchase policies between Ford and GM. Ford expects adjusted earnings in the second half of the year to be lower than the first half, but the company reconfirmed its 2024 guidance despite falling short of adjusted earnings per share expectations for the second quarter.
Stellantis faces the most challenging second half of the year, particularly in its U.S. operations. The company’s problems stem from vehicle inventory levels, manufacturing, and sales strategies. Despite these challenges, Stellantis has reconfirmed its 2024 guidance and plans to achieve its targets through new model launches, addressing U.S. issues, and implementing price cuts.
Overall, the automotive industry is facing a tough period with intense competition, excess capacity, and the need to adapt to the adoption of EVs. Automakers like Ford, GM, and Stellantis must navigate these challenges while striving for performance and delivering value to their shareholders.
