Ford, GM and other carmakers face 50% profit slump next year, UBS analysts say

SHARES of automakers Ford Motor and General Motors took a beating on Monday (Oct 10) as the outlook for the industry darkened further with at least two Wall Street analysts predicting earnings will fall steeply next year.

Profits for US and European car companies are set to drop by half next year as weakening demand leads to an oversupply of vehicles, UBS Group analysts led by Patrick Hummel wrote in a note on Monday. Meanwhile, RBC Capital Markets analyst Joseph Spak said 2023 estimates for the sector need to "move materially lower".

Ford shares sank 6.9 per cent to close at US$11.36, while GM shares dropped 3.9 per cent to US$32.29. The declines add to an already rough year for the two carmakers, whose shares have tumbled more than 45 per cent so far, as investors concerned about the many challenges of the industry - including supply-chain shortages, rising costs and a cash-strapped consumer - exited the stocks.

"Demand destruction is no longer a vague risk, but has started to become a reality," UBS analysts said. They downgraded their stock ratings on Volkswagen, General Motors and Renault to neutral and cut Ford Motor to sell.

A three-year run of "unprecedented" pricing and margins is about to end abruptly, with a glut of cars beginning to emerge as soon as three months from now, the analysts added.

For electric-vehicle maker Tesla, whose third-quarter deliveries failed to match up to expectations, both UBS and RBC analysts struck a more benign note. UBS sees the Elon Musk-led company continuing its "aggressive" growth through cutting prices and leveraging costs, while RBC's Spak said it is very well-positioned mid-term as the low-cost EV provider.

Still, demand trends will be a key item to watch for Tesla as well, Spak added. Tesla shares closed Monday down less than 0.1 per cent at US$222.96.

Multiple threats confront the industry, with strained consumers seeking to downgrade and growing inventories that will leave automakers unable to pass on inflationary pressures, the UBS analysts said. In September, Ford warned of how rising costs were affecting its earnings, prompting its stock to plunge. European auto stocks have surrendered their post-pandemic gains.

The nearer term outlook is more positive, with the third quarter expected to be another strong one for most manufacturers, the analysts wrote. Some companies may show improved margins, with Mercedes-Benz Group among those that could increase their forecast. VW, BMW and Ford are likely to show a negative earnings trend.

However, the focus will be on commentaries for the rest of the year and 2023, analysts from both UBS and RBC said. Investors are likely to overlook good news as they focus on the headwinds lying ahead for the sector, UBS analysts added.

UBS favours automakers with luxury exposure, like Mercedes-Benz, due to the higher resilience of higher-income household spending, and parts suppliers with a dominant market position and pricing power, such as Autoliv and Valeo. BLOOMBERG

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