UBS analyst Patrick Hummel downgraded both Ford Motor (F) and General Motors (GM) on Monday morning, mainly citing the destruction of demand in an upcoming downturn environment as a bearish catalyst. Hummel is rated four stars by TipRanks and is considered the top 15% to 20% analyst on Wall Street.
Hummel cut Ford Motor from “neutral” to “sell,” while also lowering his target price for that automaker from $13 to $10. Hummel is a bit more optimistic about General Motors. He cut GM from “buy” to “neutral” while taking his price target from $56 to $38.
Ford and GM
On the Ford side, Hummel writes, “Ford is behind Stellantis (STLA) in our view of North American EBIT margins and in a potentially recessionary backdrop, the risk of a break-even test is highest. Macro context, a potential obstacle to restructuring achievements has been achieved. “Ford in a nutshell,” Hummel said, “In short, Ford has one of the least attractive risk/reward profiles among Western OEMs (Original Equipment Manufacturers) from a 12-month point of view, which is why we downgraded to Sell. “
In regards to General Motors, Hummel likes the company’s momentum regarding electric vehicles, and the company’s strong launch pipeline will begin in 2023. That said, he writes that the auto industry outlook for CY 2023 is “deteriorating rapidly so the need to kill seems inevitable at a time when supply is improving.
Hummel found this led to a “paradigm shift” that ended with automakers being oversupplied. That will put pressure on profit margins. Hummel sees GM’s earnings in 2023 more than halved from 2022 and sees the whole situation as a “rapidly deteriorating top-down picture.”
Ford earnings are due on or near October 26. Wall Street is looking for adjusted EPS of $0.34 on revenue of about $36.75 billion. That looks like -33.3% earnings growth on top of 3% revenue growth. In short, Ford looks set to return to negative earnings growth driven by pedestrian sales growth after a brisk quarter. Profits will be under pressure.
This is disappointing to hear for shareholders, but that’s what it happens to be. The stock could trade for six times more earnings than expected, but that’s why. As of the end of the second quarter, the balance sheet remained “fine” with a current ratio of 1.16. The company had enough cash. The company is spending hugely on building out its EV capabilities. A harsher environment makes that transition quite challenging.
General Motors only traded with earnings five times what was expected. GM is set to report on or around October 25. Wall Street is expected to see adjusted EPS of $1.90 on revenue of $41.7 billion. If materialized, these numbers would be great for 25% profit growth on 56% revenue. This will be GM’s first quarter of the year earnings growth after four straight quarters of earnings declines. Sales growth will be GM’s fastest since Q6 2021. GM operates with a current ratio of 1.15, about the same as Ford and able to meet short-term obligations. to average.
My thoughts
In the past, I did pretty well with Ford Motor. I’ve traded GMs with no results I can easily recall, so they don’t stand out. So I am part of Ford Motor, when it comes to these two things. I believe these two companies are doing a great job in developing into the future electric vehicle companies, as well as maintaining their past of using internal combustion engines. Ford and GM will be Tesla’s main competitors (TSLA) in that space (my opinion) moving forward. perhaps more than most of the rest of the EV pack. It’s not that Tesla won’t be the best in class, but that Ford and General Motors will compete effectively.
I think it’s clear that General Motors could have had a better third quarter than Ford, and will probably go into 2023 better positioned to succeed. That said, as Patrick Hummel suspects, the United States and the planet slip into a recession by 2023, and more than a technical recession as inventories catch up with consumer demand in an environment money market easier, then yes, profit margins will be under great pressure.
Technically, both stocks are in bad shape. That doesn’t make them special in October 2022. Both were harshly rejected at their 200-day SMA. Not much is missing. Ford is the better dividend stock, yielding 3.7%. GM just brought in a dividend this past summer and it’s very small.
Readers will find that Ford Motor has followed Fibonacci’s rules in 2022 and is set for a potential double bottom scenario that could trigger a reversal. The environment would make that unlikely. A trader can…
Short sell 100 shares of F at or close to the last sale of $11.40.
– Sell one F $10 on October 28 for $0.25 raw.
– Buy one F$12.50 call on October 28 for around $0.20.
Net Basis: $11.45
Note: Calls are purchased as reverse protection. A bought order limits any potential profit but is more than a pay-for-call. Maximum Profit: $1.45 by Oct. 28. Worst case? Lose $1.05 on the same expiration date. Traders can sell another $10 put to boost the net base up to $11.70 if the trader is willing to buy F at $10 after earnings.
(Ford is the holding company.) Action Alerts PLUS Membership Club. Want to be warned before AAP buys or sells F? Learn more now.)
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