Ford and GM cushioned by economic safety features

AutoNation

25/07/2024 13:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Jonathan Guilford
       NEW YORK, July 24 (Reuters Breakingviews) - Detroit’s
shock absorbers look strong enough to withstand many bumps. Ford
Motor  F.N  and General Motors  GM.N , worth a combined $100
billion, both spooked investors after unveiling their latest
financial results this week, but for the most part the two
automakers are humming along. Although there are reasons to
worry, economic safety features will cushion the ride.
    Despite a 6% rise in second-quarter revenue from a year
earlier, Ford’s operating profit declined 27%, worse than
analysts were expecting, according to Visible Alpha. The company
pinned the decline largely on warranty issues involving models
from or before 2021. Its stock price promptly tumbled 9% in
after-market trading on Wednesday. Rival GM unveiled stronger
results a day earlier, but lost nearly $4 billion of market
value nevertheless.   
    One concern is pricing. Thanks to a lengthy
supply-constrained market, markups on Chevrolet Silverados,
Cadillac Escalades and other vehicles have contributed an
average $1.4 billion boost to GM’s quarterly operating profit
since the start of 2020. Such uplifts, which tallied $500
million combined for GM and Ford between April and June, have
helped offset mounting losses in electric vehicles, but both
companies have signaled that their pricing power may be ebbing.
    After all, nearly 6% of auto loans to customers with weaker
credit scores were at least 60 days overdue in June, per Fitch
Ratings, twice the rate in 2021. More cars are also sitting on
dealer lots, with GM and Ford inventories both up from last
year. Even so, prices of new vehicles held steady, according to
marketing firm Cox Automotive.  
    Sticky prices should help smooth the road ahead. Dealers are
retrenching, with retailer AutoNation  AN.N  reporting that the
gross margin on new vehicles is down from highs three years ago,
falling to 7% last quarter. Ford and GM also could reasonably
see scope to eat into profitability that was turbo-charged by
post-Covid-19 price-gouging before taking any hit themselves.
AutoNation’s margin is expected to normalize at about 5%, based
on estimates gathered by VisibleAlpha. 
    Americans are also overdue upgrades. The average passenger
car is 14 years old, S&P Global said in May, up from 11 years in
2012. As they return to showrooms, shoppers also may soon be
able to borrow more cheaply. Interest rates on car loans run
about 7%, up from 4% in 2022, Experian reckons, but traders are
increasingly pricing in cuts from the U.S. Federal Reserve.
These reinforced guardrails should keep the Motown duo on the
right track once prices start to sputter.
    Follow @JMAGuilford on X
    
    CONTEXT NEWS
    Ford Motor said on July 24 that it had generated nearly $48
billion in revenue for the second quarter of 2024, 6% higher
than a year earlier and 3% more than what analysts were
expecting, according to Visible Alpha. Operating profit,
adjusted for one-off charges and pension values, was $2.8
billion, down 27% from the same period in 2023, largely because
of higher warranty costs.
    Rival General Motors on July 23 also reported about $48
billion in revenue for the second quarter, 7% higher than a year
earlier and narrowly ahead of projections by analysts. Adjusted
operating profit of $4.4 billion rose 37%, and the company
raised its full-year guidance by $500 million.
    Ford said pricing across its models contributed $200 million
of additional operating profit from the previous year while GM
credited prices for a $300 million uplift.

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Graphic: Detroit's pricing power is slowing, not crashing
Detroit's pricing power is slowing, not crashing    https://reut.rs/4deQK43
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 (Editing by Jeffrey Goldfarb, Sharon Lam and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  GUILFORD/  
Jonathan.Guilford@thomsonreuters.com))