GM also downgraded, Tesla price target cut as oversupply from a slowing economy will hurt pricing power, margins and earnings
Shares of Ford Motor Co. were hit hard Monday by UBS analyst Patrick Hummel’s recommendation that investors sell, as the auto industry is facing a worrisome U-turn from undersupply to oversupply.
Hummel also cut his ratings on several other global auto makers, including General Motors Co. GM, -3.96%, saying that as a recession concerns grow, “demand destruction is no longer a vague risk.”
In addition to all of the data suggesting the economy is slowing, Hummel said growing U.S. dealer inventories, weak used-car pricing, used-car dealer profit warnings and signs indicating deteriorating orders and shorter delivery times make him more cautious on the overall auto industry.
“We think it will only take 3-6 months for the auto industry to end up in oversupply, which will put an abrupt end to a 3-year phase of unprecedented OEM [original equipment manufacturer] pricing power and margins,” Hummel wrote in a note to clients.
As part of his negative industry outlook, he cut his rating on Ford F, -6.89% to sell from neutral and his stock price target to $10 from $13, with the new target implying about 11% downside from current levels.
Ford’s stock sank 7.6% in morning trading. It was trading up just 0.6% month to date, after plunging 26.5% in September to suffer its worst monthly performance since it plummeted 30.6% during pandemic-stricken March 2020.
Hummel noted that Ford has already warned about having more vehicles in inventory than expected, and above payments to suppliers running about $1 billion higher than projected, so he sees little margin left for negative surprises in terms of fourth-quarter deliveries and supply costs.
Hummel cut his 2023 adjusted earnings-per-share estimate by 61% to 52 cents a share, to reflect a $6.5 billion drop in price and sales mix. The compares with the current 2023 FactSet EPS consensus of $1.87.
“This sounds very negative, but Ford gains $19 billion in price alone since the beginning of 2020,” Hummel wrote.
Meanwhile, GM’s stock dove 6.9% in morning trading toward a three-month low, and shares have shed 2.5% so far this month after tumbling 16% last month.
Hummel downgraded GM to neutral from buy, and dropped his price target by 32%, to $38 from $56.
The rating remains above Ford’s, because unlike its rival, Hummel noted that GM has had “no hiccups” in its third-quarter production schedule and therefore a “solid” quarterly report is expected. However, the downgrade reflects the fact that GM is “not immune” to a downturn in the industry.
Separately, Hummel also cut his stock-price target on Tesla Inc. TSLA, -0.05% to $350 from $367, saying that following a third-quarter volume report that was below expectations, it will be “more challenging” for the electric-vehicle maker to meet its 2022 delivery growth target.
However, Hummel reiterated his buy rating on Tesla, as he believes the EV maker is best positioned to use pricing as the tool to fill its factories.
“Overall, the recession outlook should result in moderately lower margins for Tesla than previously expected, but we’re highly confident that by keeping the top line [revenue] momentum, Tesla will even widen the gap vs. competitors in terms of profitability,” Hummel wrote.
Ford’s stock has fallen 3% over the past three months, while GM shares have lost 3.1% and Tesla’s stock has dropped 11.8%. In comparison, the S&P 500 index SPX, -0.75% has declined 7.5% the past three months.
Among other auto makers, he also downgraded both Renault SA RNO, -2.36% RNLSY, +1.17% and Volkswagen AG VOW, -1.28% to neutral from buy. He also downgraded auto parts makers Continental AG CON, -1.17% and Faurecia SE EO, -1.48% FURCF, -3.67% to neutral from buy.