Ford and General Motors enter new phase of price and demand uncertainty

DETROIT – Let’s talk about pricing power.

At least, General Motors and Ford engine will likely do so this week as they release fourth quarter results and guidance for 2023, with Wall Street watching for signs of weakening consumer demand and a tougher pricing landscape.

investment related news

Either issue would mean lower profits this year for automakers, which are expected to report relatively strong fourth-quarter results from subdued earnings a year earlier. GM is expected to report fourth quarter earnings per share of $1.69, a 25% increase over the prior year period, while Ford is expected to report EPS of 62 cents, more than double the 26 cents posted a year earlier, according to Refinitiv Consensus Estimates.

Automakers have posted record results in recent years amid a shortage of new vehicles and resilient consumer demand. They have been banking on sustained pent-up demand as inventory levels normalize, hoping to avoid steep discounts or incentives to move vehicles.

But this scenario is slowly neutralizing itself. And that lets new vehicle prices and profits fluctuate.

Cox Automotive reports Detroit automakers have one of the highest inventory levels in the industry, noting that vehicle counts differ significantly between brands. Also, the incentives are slowly increasing.

There are widespread fears that pent-up demand has been largely eroded amid recession fears and affordability issues stemming from rising interest rates and record prices averaging nearly $50,000 for a new vehicle.

Ford lowered starting prices for its electric Mustang Mach-E on Monday, weeks after the electric vehicle industry leader You’re here lowers its own prices.

Duncan Aldred, GM’s GMC brand manager, said the truck and SUV brand expects to continue to increase its average transaction price, which he said hit a new record high of more than 63,405. $ during the fourth quarter.

These rising transaction prices are due in part to redesigned pickup trucks and the launch of the Hummer electric SUV, which tops $110,000. GM began production of the SUV this week at a plant in Detroit, the company said during a media roundtable on Monday.

GM is due to release earnings Tuesday before markets open, followed by Ford after the bell on Thursday.

Wall Street has braced for a “demand destruction” scenario over the past few quarters, meaning much of its focus this week will be on automakers’ forecasts for 2023.

Goldman Sachs said it expects the forecast to come in below consensus, “due to price and mix as well as lower financials earnings.”

GM is expected to be heading for a roughly 20% decline in adjusted earnings per share for the full year of 2023, according to Refinitiv estimates. Ford’s 2023 EPS is expected to fall nearly 16% from 2022.

“We estimate that GM and Ford could experience a notable decline in profitability this year as earnings may be weighed down by lower vehicle prices and losses from growth in electric vehicle volumes,” wrote Emmanuel Rosner, Deutsche Bank analyst, in a note to investors earlier this month.

Rosner said direction risk is already well priced in and shouldn’t hurt stocks, however.

Morgan Stanley’s Adam Jonas expects deteriorating prices, lower-cost vehicle line-up and lower earnings from automakers’ financial arms “potentially to launch restructuring and cut ‘special projects’ to defend results “, he said in a note to investors last week.

Amid lingering recession fears, automakers have yet to announce substantial layoffs or cost cuts similar to those that have hit other sectors hard, especially technology. Wall Street will be eagerly awaiting an update on those fronts this week.

Ford reportedly plans to cut up to 3,200 jobs in Europe and shift some product development work to the United States, German union IG Metall said last week. GM, which sold its European operations in 2017, has not announced any such actions.

GM and Ford have said they will continue to invest in electric vehicles regardless of macroeconomic factors. Any changes to these plans would also be notable for investors.

—CNBC Michael Bloom contributed to this report.