Ford, GM and other automakers face 50% profit slump next year, UBS analysts say

Shares of Ford and General Motors took a beating Monday as outlook for the industry darkened further with at least two Wall Street analysts predicting earnings will fall steeply next year. 

Profits for U.S. and European car companies are set to drop by half next year as weakening demand leads to an oversupply of vehicles, UBS Group AG analysts led by Patrick Hummel wrote in a note on Monday. Meanwhile, RBC Capital Markets analyst Joseph Spak said 2023 estimates for the sector need to “move materially lower.”

Ford shares sank 7.8% to $11.25 in New York, while GM shares dropped as much as 5.6% to $31.74. Monday’s decline adds to an already rough year for the two carmakers, whose shares have tumbled more than 45% so far, as investors concerned about the many challenges of the industry — including supply-chain shortages, rising costs and a cash-strapped consumer — exited the stocks.   

“Demand destruction is no longer a vague risk, but has started to become a reality,” UBS analysts said. They downgraded their stock ratings on Volkswagen AG, General Motors Co. and Renault SA to neutral and cut Ford Motor Co. to sell. 

A three-year run of “unprecedented” pricing and margins is about to end abruptly, with a glut of cars beginning to emerge as soon as three months from now, the analysts added. 

For electric-vehicle maker Tesla, whose third-quarter deliveries failed to match up to expectations, both UBS and RBC analysts struck a more benign note. UBS sees the Elon Musk-led company continuing its “aggressive” growth through cutting prices and leveraging costs, while RBC’s Spak said it is very well-positioned mid-term as the low-cost EV provider. 

Still, demand trends will be a key item to watch for Tesla as well, Spak added. Tesla shares were down 1.5% at $219.79.

Multiple threats confront the industry, with strained consumers seeking to downgrade and growing inventories that will leave automakers unable to pass on inflationary pressures, the UBS analysts said. In September, Ford warned of how rising costs were affecting its earnings, prompting its stock to plunge. European auto stocks have surrendered their post-pandemic gains.

The nearer term outlook is more positive, with the third quarter expected to be another strong one for most manufacturers, the analysts wrote. Some companies may show improved margins, with Mercedes-Benz Group AG among those that could increase their forecast. VW, BMW AG and Ford are likely to show a negative earnings trend.

However, the focus will be on commentaries for the rest of the year and 2023, analysts from both UBS and RBC said. Investors are likely to overlook good news as they focus on the headwinds lying ahead for the sector, UBS analysts added.

UBS favors automakers with luxury exposure, like Mercedes-Benz, due to the higher resilience of higher-income household spending, and parts suppliers with a dominant market position and pricing power, such as Autoliv Inc. and Valeo SA.