Nightmarish Profit Warnings Have Detroit Reliving Bad Old Days
(Bloomberg) -- It felt so 2009.
First, General Motors Co. and Fiat Chrysler Automobiles NV reported weak earnings, with both reining in profit forecasts for the year. That sparked sharp sell-offs of their stocks.
Then it really got ugly. Ford Motor Co. took the stage and projected $11 billion in charges linked to a restructuring plan that will take as long as five years to play out. The already-struggling company that had touted plans to cut $25.5 billion in costs in the coming years left analysts wanting more detail and subjecting Chief Executive Officer Jim Hackett to harsh questioning.
Not since the financial crisis and Carpocalypse have Detroit automakers had so much bad news in one day. To be clear, all of the companies are solidly profitable and nowhere near the edge of survival like they were in 2009. They also aren’t alone: Daimler AG had already cut its profit outlook, citing the trade climate, and Hyundai Motor Co. missed second-quarter estimates.
But what made the headlines all the more confounding was that the downbeat results and outlook came at a time when the U.S. auto market is solid, the economy is humming and China is buying more cars every month.
“To have a quarter like this is striking,” said James Albertine, an auto equities analyst with Consumer Edge Research. “Every time they turn over a rock, they find more problems.”
GM’s profit issues were mostly caused by external forces, namely President Donald Trump’s steel and aluminum tariffs and depressed currencies in Argentina and Brazil. Fiat Chrysler will have to sort out slumping sales in China under a CEO after the death of Sergio Marchionne announced early Wednesday. And Ford’s problems stem from bloat and stale models.
Ford’s China Woes
Ford missed estimates by posting adjusted profit of 27 cents a share, less than half what it earned on that basis a year earlier. The Dearborn, Michigan-based company said it will make between $1.30 and $1.50 a share instead of as much as $1.70. It lost a combined $467 million in Asia and Europe in the second quarter.
In China -- still a reliable source of growth for many other major automakers -- Ford’s sales fell by 25 percent in the first half. Beijing’s retaliatory tariffs against the U.S. that include higher levies on cars will cost the company $200 million to $300 million this year, Chief Financial Officer Bob Shanks said.
Ford’s problems in the market are manifold: models including the Focus and Escort cars are old and will be replaced late this year and into 2019. Its dealers aren’t making adequate profits, burdened by a glut of sedan inventory and not enough sport utility vehicles.
The company has other deep structural issues. On its earnings call, analysts asked for more detail on the costly and protracted restructuring, and Hackett gave little clarity. The company also said that it will postpone an investor meeting that had been set for September, saying it would be rescheduled for when it had more specifics to share.
That sparked a tense exchange with Morgan Stanley analyst Adam Jonas, who criticized Hackett and Shanks for the lack of communication. “I really do hope you can reconsider the communications strategy, because it’s just not good enough, Bob,” Jonas said.
The stock sank below $10 a share in after-hours trading, a level it hasn’t closed at since 2012, when former CEO Alan Mulally was still restructuring the company. The shares were at $10.15 as of 8:05 a.m. Thursday before regular trading, 3.5 percent below Wednesday’s close.
Jeep’s China Struggles
Fiat Chrysler isn’t in nearly the bind Ford is, but new CEO Mike Manley has plenty of problems, too. The much-heralded Jeep brand hasn’t caught on in China -- a key element of the growth strategy laid out only a matter of weeks ago.
The redesigned Jeep Compass that’s been a hit in the U.S. has struggled going up against local Chinese brands that are on the ascent in the countries mass market segments.
As a result, the company’s Asian operations lost 98 million euros ($115 million) in the second quarter. Its luxury brand Maserati also slumped as customers waited for a July duty reduction to take delivery of Levante SUVs. Fiat Chrysler’s U.S.-listed shares plunged 12 percent Wednesday, their worst one-day drop since June 2016. On Thursday, the stock surged as much as 5.6 percent in Milan after Trump agreed not to raise tariffs on European cars, like the Alfa Romeo Giulia sedan.
GM is telling more of a hard-luck story. Trump’s steel and aluminum tariffs have driven up metals prices and contributed to commodities adding $300 million to costs in the quarter and $500 million in the first half. The company had been expecting that sort of a headwind for the whole year. Instead, it’s now seeing about a $1 billion blow to annual earnings.
Add in a $100 million hit from devalued Argentine peso and Brazilian real and GM had to lower its forecast for adjusted earnings to $6 a share. The company had been expecting to make as much as $6.50. GM’s shares fell Wednesday by the most since February 2017; they’re down less than 1 percent in early trading Thursday.
Don’t Want to Hear It
But investors may not be interested in hearing the company make its case for a while, said Morningstar Inc. analyst David Whiston.
“It was a really bad day,” Whiston said. “There are a lot of factors beyond their control. In addition to all of that, we’re at the top of the auto cycle and investors just aren’t interested.”
Indeed, Ford’s stock “will be in purgatory for some time,” Albertine said.
In what was perhaps a sign of just how fed up Wall Street was by the end of the day, the first questioner on Ford’s Wednesday evening earnings call was Jonas, who asked whether Hackett expected to still be in the job once the company is ready to have its investor day.
“Hell yes, I expect to be in front of everybody declaring where we’re going and what we want to get done,” Hackett responded. “There should be zero question around that.”
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