General Motors, Ford, and Fiat Chrysler Automobiles will all report first-quarter earnings this week.
The outlook is for continued profitability, not a big surprise given that US auto sales have been running at a 17-million annual pace, with a mix rich in moneymaking SUVs and pickup trucks.
But Wall Street will be scrutinizing the Big 3 carefully this time around, for several reasons:
1. The Tesla Factor
Tesla reports its own first-quarter earnings next week, and they’re expected to be awful, a big loss. That’s predictable, of course. Tesla has almost never turned a profitable quarter since its 2010 IPO. The carmaker is in the process of preparing to launch its $US35,000 mass-market Model 3 vehicle, and that effort should consume billions.
But Tesla’s market capitalisation has also risen to vertiginous levels, surpassing that of Ford’s and FCAs. Tesla is now the second largest US automaker, financially if not by sales numbers, and that has Detroit both impressed and freaked out. Wall Street thinks there’s now a Big 4 — and it’s decided that perennially money-losing Tesla deserves about a $US50-billion valuation based on its future prospects.
You might ask, “What does that have to do with the Big 3’s earnings?” The answer is: “A lot!” The Big 3 have for the most part seen their share prices go sideways throughout a sales recovery in the US that’s witnessed the market set new records as Detroit has printed money with SUVs and pickups.
It’s an open question whether Tesla has sucked up all the oxygen in the room, but there’s no doubt that Elon Musk’s company has seen the most dramatic price appreciation in the sector, minting a thesis among analysts that say the Big 3’s best days are behind them.
2. The Ford Factor
While GM and FCA have been running free with SUVs and Jeeps, respectively, Ford has been in process of revamping some its core products: the F-Series pickups. Wall Street has been a defensive mode with Ford of late, largely due to the notion that Ford is more exposed to a US sales downturn.
However, Ford still has the best-selling vehicle of all time, the F-150 pickup, and its all-new F-Series Super Duty truck has been on sale for a while now. Some of that revenue — and the steep profits that go along with it — could be hitting Ford’s numbers as its reports on Q1.
On balance, Ford appears reasonably well-equipped to ride out a downturn, but if it reports weak numbers for Q1, investors could seize the excuse to rotate into other names in the sector.
3. FCA’s passenger-car strategy
The strategy is to ditch cars and go all-in on SUVs and trucks.
This game plan is Trump-friendly, by the way, as it means FCA would potentially hire at and invest in its US factories. Analysts will be seeking some insight into how this switchover is going from CEO Sergio Marchionne (who will also be attending to Ferrari earnings next week).
4. GM’s sale of Opel to Peugeot
GM’s $US2-billion deal to unload its European Opel/Vauxhall divisions after years of cash-draining underperformance has been greeted with rejoicing at GM headquarters. The move will remake the European auto market, making the PSA Group in the number two company behind Volkswagen.
More importantly, it will continue a GM theme of focusing on return on invested capital, a key theme of CEO Mary Barra. GM has other irons in the fire, ranging from its self-driving car efforts to its entry into mobility services with its new Maven brand, but Wall Street will be looking for Barra’s take on what the Opel sale means for GM moving forward — and there could be particular attention this quarter on the China outlook, where GM is a big player.
5. US sales outlook
Wall Street is making noise about subprime lending and fretting over a cyclical sales downturn, but the dynamics of the current US market suggest another 17-million sales year. That’s half a million fewer vehicles rolling off dealer lots that in 2016, but with SUVs and pickups strong in the mix, the pace could drop to 15 million-16 million and Detroit would still be fat and happy.
Ford’s management has been more circumspect about this boom continuing, so we’ll be awaiting CEO Mark Fields’ perspective on the topic. We’ll also be seeking Fields’ thoughts on Ford’s ongoing investments in shared and autonomous mobility.
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