Detroit 3 financials ‘disappointing' as challenges mount

The Detroit Three's latest earnings reports disappointed Wall Street investors, sending shares plunging over hurdles ranging from weakening electric-vehicle demand and pricing pressure to quality woes and manufacturing challenges.

Ford bore the brunt of investor discontent as its stock fell 18 per cent, the largest single-day drop since 2008. The company posted a 4.5-per-cent decline in second-quarter net income after warranty costs unexpectedly rose $800 million (all figures in USD).

Stellantis shares sank eight per cent after a 48-per-cent first-half net income plunge, with CEO Carlos Tavares complaining of too many quality problems on new vehicles coming off U.S. assembly lines. General Motors' second-quarter net income rose 14 per cent and the automaker raised its full-year guidance for the second time in three months, but its stock still fell on concerns that growth could slow in the second half.

The results indicate the automakers face a bumpy road as they juggle costly EV plans while managing profits on gasoline and hybrid models in an uncertain market environment. Notably, many of the challenges are coming in North America, which for years has been a reliable profit driver.

"Auto remains one of the more challenged industries in the world in terms of competition, excess capacity, cyclical and secular risks," Morgan Stanley analysts wrote in a July 24 investor note downgrading their outlook for GM. "GM management deserve credit for improving a range of business factors within its control. It's the long list of factors that remain outside the company's control that move us into the 'pit lane' on the name at this time."

Morgan Stanley's reasons to be concerned included rising inventories, higher incentives and vehicle affordability. A separate note on Ford a day later cited those same issues, though without downgrading its stock, citing the potential of CEO Jim Farley's Ford+ business plan.

"The stakes are high," the analysts wrote. "The volatility is discomforting. But with proper execution we believe the reward can also be high."

Even as Ford's second-quarter net income fell to $1.8 billion, the company credited the Ford Pro commercial vehicle business for helping push revenue 6.4 per cent higher to $47.8 billion.

Ford kept its full-year adjusted earnings guidance unchanged at $10 billion to $12 billion before interest and taxes, while raising free cash flow projections by $1 billion.

Still, Ford was hampered by warranty expenses that surged $800 million from the previous quarter. The issues largely related to pre-2021 vehicles.

CFRA Research analyst Garrett Nelson, in an investor note, called the quarter "disappointing," noting "investors may be losing patience with the story despite management's insistence that it is laying the foundation for profitable, long-term growth with its Ford+ plan."

Executives maintained that Ford is on the right path.

"We are absolutely a different company than we were three years ago," Farley said, citing strength in the commercial business and growing revenue from software subscriptions.

"We can't read this quarter that the year is coming off tracks; it's not," CFO John Lawler told reporters. "We're very confident in where we're at this year, the plan is working and we'll continue to work at it. Again, in this transformation, it's not going to be a straight line up."

Stellantis is suffering from a number of issues, Tavares said. The company attributed much of its weaker first-half performance to North America, where revenue was down 16 per cent.

Tavares said Stellantis has not been building the right number and kinds of vehicles to meet market demand, needs to better present its available incentives, and has been hurt by supply chain disruptions and quality issues.

Stellantis has "lost a lot of profitability in North America" this year, going from the most profitable of the company's six regions last year to fourth in the first half of 2024, he said.

"People that think that we are making our money easily, they are wrong," Tavares said. "This is a very tough industry, a very tough period and everybody has to fight for performance."

GM raised its forecast for adjusted earnings before interest and taxes by $500 million, to a range of $13 billion to $15 billion. But it also lowered its net income forecast by $100 million, to $10 billion to $11.4 billion.

Pricing has been stable while incentives remain low, GM executives said, but the company sees headwinds in the second half of the year that include its struggling business in China, higher commodity prices and slightly lower vehicle pricing.

GM's EV business, while growing, also faces challenges. The company pulled back its EV production target for 2024, saying now it expects to build and wholesale as many as 250,000 this year.

"We believe that GM's new guidance remains conservative even with some incremental headwinds," among them "higher volume of lower-profit EVs," BofA Securities analysts wrote in a July 24 research note.

GM also is delaying production of electric pickups at its Orion Assembly plant in Michigan by six months to mid-2026 and postponing the launch of Buick's first electric vehicle, CEO Mary Barra told analysts.

"It appears the room for caution in GM's guide is partially related to risks in the EV market (overall) as well as making room for potential competitive pricing actions that can have an impact on GM's business," Morgan Stanley analysts wrote. "Risks around broader EV market fundamentals impact GM given both the scale, vertical integration and quantum of capital it has allocated to the EV market over the past five years."