Sales, Cycle And Strike Expected To Impact Big 3 Auto Earnings

Expect a generally uninspiring third quarter from the "Big 3" automakers on continued international uncertainty that’s weighing on sales, one-time product cycle issues and a strike, Bank of America said ahead of earnings reports from the three major U.S. manufacturers.

Ford Motor Company F was “treading water” in the third quarter, while the report from Fiat Chrysler Automobiles NV FCAU will be “likely uninspiring,” the firm said. And the one company that could have been set for a positive inflection, General Motors Company GM will see a hit to earnings because of a just-ended strike.

The Analyst

Bank of America analyst John Murphy reiterated a Buy rating on GM with a price target of $55.

Murphy maintained a Buy rating on Ford with a $13 price target.

Murphy remains Neutral on Fiat Chrysler with an $18 target price.

Ford ‘Low Water Mark’

The third quarter is “expected to be the low water mark” of a year of restructuring and spending on new product launches for Ford, with early estimates indicating a North America production drop of 2% in the quarter. Murphy is forecasting a year-over-year decline in EBIT, with part of driven by higher costs from the new program launches.

Improvement should come in the fourth quarter, and things look better in 2020, Murphy wrote in a note, saying the company has an upcoming favorable product cadence in its North America market, and that investor sentiment will recover eventually.

While Ford saw shares drop on a recent credit rating downgrade by Moody’s, the financial implications in the short-term seem minimal, Murphy wrote.

Ford reports earnings after the close on Oct. 23.

Fiat Chrysler

Early estimates show Fiat Chrysler’s North America production down about 6% year-over-year in North America, with trucks down 10%, though with tough comps. International strength should help mitigate the North American sluggishness.

Murphy said third quarter results may be overshadowed by investor focus on next steps for the company after its withdrawal of a merger proposal with Renault. While there may be some upside on merger possibilities, Murphy said BOA remains Neutral to reflect “ongoing and significant cycle and macro risk” for the core business, including weakness in the U.S. and China, volatility in Europe and other issues.

Fiat Chrysler reports on Oct. 31.

GM Report Marred By Strike

The one automaker that could have engendered more excitement was GM, which had looked to be headed for a quarter of increased truck production and positive volume/mix, Murphy said.

But GM lost two weeks of production in the quarter (with more production lost in the fourth quarter) to a strike that had its plants idled. The United Auto Workers announced on Wednesday a tentative agreement that could end the walkout.

Murphy said GM’s production looks to have declined about 5% (instead of the 8% increase projected before the strike) with cars down 45%. The strike forced an adjustment in expectations, with Murphy now forecasting EBIT to decline year-over-year on negative volume/mix and cost deleverage.

The overall strike hit in the third quarter was about $750 million, he said, with a $2.5 billion coming in the fourth quarter. The UAW strike and production downtime have now pushed the earnings and cash flow inflections that had been expected in the second half of the year into 2020, Murphy said, noting a lowered 2018 EPS estimate of $4.95, down from $6.85 to reflect the strike.

GM will report quarterly results on Oct. 29.

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