Ford vs. GM: I’m Only Trading One

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

Hummel cut Ford Motor from “neutral” to “sell”, while reducing his target price for that automaker from $13 to $10. Hummel is slightly more optimistic concerning General Motors. He cut GM from a “buy” to a “neutral” rating while taking his target price from $56 to $38.

Ford and GM

On the Ford side, Hummel wrote, “Ford ranks behind Stellantis (STLA) in terms of North American EBIT margins and in light of the likely recession, has the highest risk of testing break-even points, in our view.” Hummel goes on… “The European business could become loss-making against a difficult macro backdrop, a potential setback to restructuring achievements made.” Wrapping up on Ford, Hummel states, “In a nutshell, Ford has one of the least attractive risk/reward profiles amongst Western OEMs (Original Equipment Manufacturers) on a 12 month view, which is why we downgraded to Sell.”

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

Hummel sees this leading to a “paradigm shift” that winds up with the automakers being over-supplied. That will pressure margin. Hummel sees GM earnings more than halving in 2023 from 2022, and refers to the entire situation as a “rapidly deteriorating top-down picture.”

Ford earnings are due on or close to October 26th. Wall Street is looking for adjusted EPS of $0.34 on revenue of about $36.75B. That would look like earnings growth of -33.3% on revenue growth of 3%. In short, Ford appears set to return to negative earnings growth on pedestrian sales growth after one quarter of rapid growth. Margins will be pressured.

This is disappointing to hear for shareholders, but it is what it is. The stock may trade at six times forward looking earnings, but that is for a reason. As of the end of the second quarter, the balance sheet was in “okay” shape with a current ratio of 1.16. The firm had enough cash on hand. The firm is spending huge on building out its EV capabilities. A tougher environment makes keeping that transition on schedule quite difficult.

General Motors only traded at five times forward looking earnings. GM is set to report on or about October 25th. Wall Street expects to see adjusted EPS of $1.90 on revenue of $41.7B. If realized, these numbers would be good for earnings growth of 25% on revenue of 56%. This would be GM’s first quarter of year over year earnings growth after four consecutive quarters of earnings contraction. The 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 have done quite well being long Ford Motor. I have traded GM without results that I can easily recall, so they must not stand out. Thus, I am partial to Ford Motor, when it comes down to these two. I do believe that these two firms are doing an outstanding job of evolving into electric vehicle companies moving forward, as well as maintaining their internal combustion driven past. Ford and GM will be the primary competitors to Tesla (TSLA) in that space (my opinion) moving forward. probably more so than most of the rest of the EV pack. Not that Tesla won’t be best in class, but that Ford and General Motors will effectively compete.

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

Technically, both stocks are in awful shape. That does not make them special in October of 2022. Both have been sharply rejected at their 200 day SMAs. Neither has been heavily shorted. Ford is the better dividend stock, yielding 3.7%. GM just brought back the dividend this past summer and it is tiny.

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

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

– Sell one Oct 28th F $10 put for a rough $0.25.

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

Net Basis: $11.45

Note: The call is purchased as upside protection. The purchased put limits any potential profit but more than pays for the call. Max profit: $1.45 by Oct 28th. Worst case? Loss of $1.05 by the same expiration. Traders could sell an extra $10 put in order to drive the net basis up to $11.70 if the trader is willing to be long F at $10 after earnings.

(Ford is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells F? Learn more now.)