A nightmare scenario is beginning for Ford and General Motors

•Ford CEO Mark Fields is reportedly under pressure ahead of the company’s shareholder meeting.

•Traditional automakers have been hugely profitable, but Wall Street has ignored this fundamental.

•Tesla, meanwhile, has seen its market cap surge while continuing to post huge losses.

Running a major American car company is a huge challenge, but for the most part, the executive teams at both Ford and General Motors have executed well since the US auto market cratered after the financial crisis.

The US market has come roaring back, and with booming pickups and SUV sales. Ford, GM, and Fiat Chrysler Automobiles have all booked quarter after quarter of profits, and GM and Ford are currently sitting on very solid balance sheets.

Wall Street, meanwhile, has been indifferent to this epic recovery where Ford and GM are concerned. FCA stock is up 40% over the past 12 months, but Ford has declined since 2014 and GM has been basically flat.

There’s chatter that FCA may be considering spinning off some of its assets, as it did in 2015 when it staged an IPO for Ferrari. Shares of the Italian supercar maker have outperformed everything else in the auto sector since, even Tesla, which has enjoyed a huge rally in the first quarter.

That could explain why FCA, which is a perennial third-place runner among the Big Three, saddled with debt and overseen by a CEO, Sergio Marchionne, who seems to want nothing more than to merge with somebody, is up when Ford and GM have disappointed.

The situation at GM and Ford is now getting critical, as the industry prepares for a cyclical downturn in sales.

Impatient shareholders

Tesla Detroit sales vs market cap

Andy Kiersz/Business Insider
Tesla is bigger than … Ford?!

At GM, Greenlight Capital’s David Einhorn wants to use his firm’s over-2% share of the company to undertake an exotic dual-share plan. GM stock would be split into dividend-paying shares and growth shares. Under the current structure, GM has been spending billions to buy back stock, but the share price hasn’t moved much. GM has also been paying a dividend that gives patient investors a nearly 5% yield.

But Einhorn thinks GM’s $US50-billion market cap could be double what it is now.

GM has rebuffed his plan, largely on the grounds that it would create management conflicts and undermine GM’s investment-grade credit rating. Einhorn has accused GM of misrepresenting his proposal to the ratings agencies. A tense standoff has developed ahead of GM’s shareholder meeting next month, with Einhorn nominating three new directors for the board.

At Ford, CEO Mark Fields is in the hot seat prior to Ford’s own meeting.

According to Bloomberg’s Keith Naughton, Ford’s board “scheduled extra time in their meetings this week in advance of Thursday’s annual shareholders’ meeting so they could question Fields on his strategy as Ford’s stock
continues to stall, said a person, who asked not to be identified revealing internal deliberations.

Naughton added that “shares have fallen 35 per cent since Fields became CEO July 1, 2014,” and that “[i]investors have been indifferent to Fields’ plan to pour billions into new technologies like driverless cars and robo-taxis to take on upstarts like Uber Technologies Inc. and Waymo, Alphabet Inc.’s self-driving spinoff.”

The additional pressure comes as Ford saw a pullback in first-quarter profits — something the carmaker had been warning Wall Street about.

Good performance, no rewards

Tesla vs FerrariAndy Kiersz/Business InsiderNot all carmakers have seen their shares languish.

Ford didn’t actually have a bad quarter, it simply didn’t make as much money as it did during the same period in 2016. The carmaker is still expecting to see sales in the US sustain at a 17-million-plus level in 2017, according to CFO Bob Shanks. At that level, with Ford’s mix of SUVs and especially given its bestselling F-150 pickup truck, the automaker should remain steadily profitable for the balance of the year.

Meanwhile, Tesla — losing money by the bucketful and selling barely 80,000 vehicles in 2016 — has been rewarded with a market cap that has surpassed Ford’s $US44 billion and that rivals GM’s market cap.

This has been fun to watch, but the disparity between publicly traded carmakers that offer limited growth, but steady profits, and one that has almost no chance of making money is getting alarming.

We’ve seen the shareholder pressure on Detroit’s c-suites coming for a while. The management at GM and Ford have done the logical thing, boosting their dividends and buying back stock. But the markets haven’t responded.

This doesn’t make much sense, because if nothing else GM and Ford offer safe havens for cash, while FCA and Ferrari provide the chance to invest in risk. So it’s hard to say that a low-yield world is driving everybody into the arms of Tesla and its incredibly effective capital-obliteration machine.

Bring on the downturn

The only real wake-up call will probably be a downturn in sales, which will likely hit Tesla just as hard as everybody else, possibly harder. Musk did get Tesla through the financial crisis, but at the time the company was selling only one vehicle, and selling it in tiny numbers.

The current management of GM and Ford were present for the massive plunge in sales in 2009 and 2010, so they know how to deal with the worst. (FCA was created at the time from the combination of Chrysler, which was on death’s door, and Fiat, so the management dynamics there were somewhat different.) They say that they can make money in a US market in which sales fall to 11 million annually.

If they can pull that off, then they can definitely make money during a moderate downturn to 15 million to 16 million — and continue to invest in future transportation technologies.

So, unfortunately, the only way that Ford and GM’s management will be able to prove their mettle is to confront the bad times. Their ability to print money during the good times has been ignored.

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