Ford vs. GM: I’m only Trading One

Analyst Patrick Hummel of UBS downgraded Ford Motor ( F ) and General Motors ( GM ) on Monday morning, mainly citing the destruction of demand in a coming recession environment as a downside catalyst. Hummel is rated four stars by TipRanks and is considered a top 15% to 20% analyst on Wall Street.

Hummel cut Ford Motor from “neutral” to “sell,” and lowered his price target for the automaker from $13 to $10. Hummel is a little more positive about General Motors. He cut GM from a “buy” to a “neutral” rating while lifting his target price from $56 to $38.

Ford and GM

On Ford’s side, Hummel wrote, “Ford is behind Stellantis (STLA) in terms of North American EBIT margins and given the likely recession, it has the highest risk of testing break-even points in our view.” Hummel continues… “The European business could face a loss in a difficult macro context, which could reverse the restructuring achievements made.” Wrapping up on Ford, Hummel says, “In short, Ford has one of the least attractive risk/reward profiles among Western OEMs (Original Equipment Manufacturers) on a 12-month view, which is why we downgrade to Sell.”

As for General Motors, Hummel likes the firm’s momentum around electric vehicles, and the firm’s beefy launch pipeline heading into 2023. That said, he writes that the auto sector’s outlook for CY 2023 is “deteriorating to fast so that demand destruction seems inevitable at a time when supply is improving.

Hummel sees this as a “paradigm shift” that ends the oversupply of automakers. That will put pressure on margins. Hummel sees GM earnings more than halving in 2023 from 2022, and refers to the overall situation as “a rapidly deteriorating top-down picture.”

Ford’s earnings are due on or near October 26. Wall Street is looking for adjusted EPS of $0.34 on revenue of about $36.75B. That would equate to earnings growth of -33.3% on revenue growth of 3%. In short, Ford looks set to return to negative earnings growth on pedestrian sales growth after a quarter of brisk growth. Pressure will be applied to the edge.

This is disappointing to hear for the shareholders, but it is what it is. The stock may trade at six times forward-looking earnings, but that’s for a reason. At the end of the second quarter, the balance sheet was in “okay” shape with a current ratio of 1.16. The firm had a lot of cash on hand. The firm is spending a lot of money on developing its EV capabilities. A tougher environment makes it difficult to keep that transition on schedule.

General Motors traded at just five times forward-looking earnings. GM is set to report on or around October 25th. Wall Street is expecting adjusted EPS of $1.90 on revenue of $41.7B. If achieved, these numbers would be good for earnings growth of 25% on revenue of 56%. This was GM’s first quarter of year over year earnings growth after four consecutive quarters of earnings contraction. Sales growth would be GM’s fastest since the June 2021 quarter. GM runs with a current ratio of 1.15, which is comparable to Ford, and can meet short to medium obligations.

My Thoughts

In the past, I did well as Ford Motor long. I’ve traded GM without results that I can easily recall, so they can’t stand out. So, I’m partial to Ford Motor, when it comes down to both. I believe both of these firms are doing a great job of evolving into electric vehicle companies going forward, as well as maintaining their internal combustion powered past. Ford and GM will be Tesla’s ( TSLA ) main competitors in that space (in my opinion) going forward. probably more than most of the rest of the EV pack. It’s not that Tesla won’t be best in class, but that Ford and General Motors will compete effectively.

I think it’s clear that General Motors probably had a better third quarter than Ford, and it probably goes into 2023 better positioned for success. That said, as Patrick Hummel suspects, if the US and the planet go into recession in 2023, and more than a technical recession as inventories catch up with consumer demand in an easier monetary environment, then yes, pressure will be applied big on margins.

Technically, both stocks are in terrible shape. That doesn’t make them special in October 2022. Both were sharply rejected at their 200-day SMAs. Neither was shortened either. Ford is the best dividend stock, coming out 3.7%. GM brought back the dividend last summer and it’s tiny.

Readers will see that Ford Motor has played with the Fibonacci rules in 2022, and is set for a double bottom scenario that could provide a reversal. The environment would make that unlikely. A trader could…

– Sell 100 F shares short at or near the last sale of $11.40.

– Sold one October 28 F $10 added for $0.25 roughly.

– Buy one October 28 F $12.50 call for about $0.20.

Net Basis: $11.45

Note: The call is bought as upside protection. The bought end limits any potential profit but the call pays the most. Maximum profit: $1.45 by October 28. Worst case scenario? Loss of $1.05 on the same expiration. Traders could sell an additional $10 to drive the net base up to $11.70 if the trader is willing to be long F at $10 after earnings.

(Ford is a holding in the Action PLUS member club alerts. Do you want to be informed before buying or selling AAP F? Learn more now.)

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