Ford, GM and Fiat Chrysler all has a week to forget as results disappointed and bad news just kept rolling in
'Carpocalpyse 2' strikes as US auto makers suffer tough times
First, General Motors and Fiat Chrysler Automobiles reported weak earnings last week, with both reining in profit forecasts for the year. That sparked sharp sell-offs of their stocks.
Then it really got ugly. Ford Motor took the stage and projected $11 billion in charges linked to a restructuring plan that will take as long as five years to play out. The already-struggling company that had touted plans to cut $25.5bn in costs in the coming years left analysts wanting more detail and subjecting chief executive Jim Hackett to harsh questioning, according to Bloomberg.
Not since the financial crisis and "Carpocalypse" have Detroit auto makers had so much bad news in one day. To be clear, all of the companies are solidly profitable and nowhere near the edge of survival like they were in 2009. But what made the headlines all the more confounding was that the downbeat results and outlook came at a time when the US car market is solid, the economy is humming and China is buying more cars every month.
“To have a quarter like this is striking,” said James Albertine, an auto equities analyst with Consumer Edge Research. “Every time they turn over a rock, they find more problems.”
GM’s profit issues were mostly caused by external forces, namely US President Donald Trump’s steel and aluminium tariffs and depressed currencies in Argentina and Brazil. Fiat Chrysler will have to sort out slumping sales in China under a new CEO after the death of Sergio Marchionne announced early Wednesday. And Ford’s problems stem from a bloated range and stale models.
Ford missed estimates by posting adjusted profit of 27 cents a share, less than half what it earned on that basis a year earlier. The Michigan-based company said it will make between $1.30 and $1.50 a share instead of as much as $1.70. It lost a combined $467 million in Asia and Europe in the second quarter.
In China - still a reliable source of growth for many other major car makers - Ford’s sales fell by 25 per cent in the first half. Beijing’s retaliatory tariffs against the US that include higher levies on cars will cost the company $200m to $300m this year, chief financial officer Bob Shanks said.
He described as a "very tough quarter" as Ford cut its full-year earnings forecast for 2018 and its stock fell more than 2 per cent in after-market trading, according to Reuters.
Ford’s problems in the market are manifold: models including the Focus and Escort cars are old and will be replaced late this year and into 2019. Its dealers aren’t making adequate profits, burdened by a glut of saloon inventory and not enough 4x4s, Bloomberg said.
The company has other deep structural issues. On its earnings call, analysts asked for more detail on the costly and protracted restructuring, and Mr Hackett gave little clarity. The company also said that it will postpone an investor meeting that had been set for September, saying it would be rescheduled for when it had more specifics to share.
That sparked a tense exchange with Morgan Stanley analyst Adam Jonas, who criticised Mr Hackett and Mr Shanks for the lack of communication. “I really do hope you can reconsider the communications strategy, because it’s just not good enough, Bob,” Mr Jonas said.
The stock sank below $10 a share in after-hours trading, a level it hasn’t closed at since 2012, when former CEO Alan Mulally was still restructuring the company.
Fiat Chrysler isn’t in nearly the bind Ford is, but new CEO Mike Manley has plenty of problems, too. The much-heralded Jeep brand hasn’t caught on in China - a key element of the growth strategy laid out only a matter of weeks ago.
The redesigned Jeep Compass that’s been a hit in the US has struggled going up against local Chinese brands that are on the ascent in the countries mass market segments.
As a result, the company’s Asian operations lost $115m in the second quarter. Its luxury brand Maserati also slumped as customers waited for a July duty reduction to take delivery of Levante 4x4s. Fiat Chrysler’s US-listed shares plunged 12 per cent, their worst one-day drop since June 2016.
Mr Manley said "very, very cost conscious" Chinese consumers sat waiting for prices to come down. A rise in FCA's inventory will continue to impact results as stocks are cleared ahead of new emissions regulations, he added, according to Reuters.
FCA Italy-listed shares fell 15.5 per cent and were suspended in Milan.
GM is telling more of a hard-luck story. Mr Trump’s steel and aluminium tariffs have driven up metals prices and contributed to commodities adding $300m to costs in the quarter and $500m in the first half, Bloomberg said. The company had been expecting that sort of a headwind for the whole year. Instead, it’s now seeing about a $1 billion blow to annual earnings.
Chief financial officer Chuck Stevens said GM put in a "solid performance" in the second quarter "despite some fairly significant headwinds that have built throughout the year," Reuters reported.
Add in a $100m hit from devalued Argentine peso and Brazilian real and GM had to lower its forecast for adjusted earnings to $6 a share. The company had been expecting to make as much as $6.50, Bloomberg said.
GM has new pickups going on sale next month, although they won’t be available in substantial supply until the fourth quarter. And while the China market is getting tough, GM is growing luxury sales with Cadillac and its local Baojun brand is winning over the nation’s new middle class.
But investors may not be interested in hearing the company make its case for a while, said Morningstar analyst David Whiston.
“It was a really bad day,” Mr Whiston said. “There are a lot of factors beyond their control. In addition to all of that, we’re at the top of the auto cycle and investors just aren’t interested.”
GM said it now expects to earn around $6 per share, down from its previous forecast of $6.30 to $6.60.
"The magnitude is greater than expected and the headwinds could’ve probably been better communicated in advance," Citi analyst Itay Michaeli said in a research note, Reuters reported.
Indeed, Ford’s stock “will be in purgatory for some time,” Mr Albertine told Bloomberg.
In what was perhaps a sign of just how fed up Wall Street was by the end of the day, the first questioner on Ford’s Wednesday evening earnings call was Mr Jonas, who asked whether Mr Hackett expected to still be in the job once the company is ready to have its investor day.
“Hell yes, I expect to be in front of everybody declaring where we’re going and what we want to get done,” Mr Hackett responded. “There should be zero question around that.”
Time, of course, will be the judge.