Future China Sales Are Big Concern For US Automakers & Other Manufacturers
What GM Investors May Want to Take Away From the Ford Earnings Report
Two weeks ago, we pointed out that auto sales were deteriorating, and if nothing changed (in terms of trajectory), major U.S. carmakers like General Motors (GM) and Ford Motor (F) could both find themselves in trouble faster than many investors believed was plausible. The alternative side argued that the declines in United States automobile sales seen over the course of the first six months of the year were unfair comparisons to the red-hot auto market through the end of 2015 and that both companies were ready to do great things in China... which has just entered a new era of personal consumption.
When General Motors reported, some held up the numbers as a glass-half-full response to the notion that the automobile industry was hitting a headwind. Some of the data nuggets GM unveiled were concerning, but others showed plenty of promise. Now that Ford Motor has unleashed even more alarming second quarter results, however, it's becoming increasingly difficult for F and GM owners to say it's just a temporary headwind.
The Ford numbers: Last quarter, Ford earned 49 cents per share on $39.5 billion worth of revenue. The top line was better than the year-ago sales figure of $37.3 billion, but the bottom line fell from 54 cents per share in the second quarter. Profit margins fell from 8.4% to 7.7%. Deliveries fell by 2000 vehicles, to 1.694 million on a year-over-year basis.
The numbers have been broadly described by some as "not that bad,' and truth be told, they're not horrifying. They do underscore a key question though.... where is all this heading?
A big crux of the story, of course, is China, where the company's equity income (from partnerships) fell 28% year-over-year. Ford noted a planned plant closure and an adverse currency environment was a problem, but also conceded there was soft demand in China. The question is, how much is "soft demand?" Meanwhile, Ford's North America unit saw earnings as well as margins fall year-over-year, at least in part to rising incentives. It matters, in that 90% of the company's bottom line comes from North America.
Ford Motor's results compare AND contrast with GM's.
Last quarter, General Motors grew its revenue by 11%, reaching $42.4 billion... a record-breaking top line. Adjusted pre-tax income of $3.9 billion was also a record-breaker. The second quarter's sales of 2.4 million units was right in line with the year-ago tall.
The oddity: Had it not been for General Motors' Chinese brand Baojun, GM would have posted more than a noticeable decline in revenue. Its U.S. brands, on an overall basis, saw sales fall by quite a bit about 52,000 vehicles, to be precise).
From a GM investor's perspective, the question is, what are the odds Baojun can keep up the 78% growth pace indefinitely, carrying the bulk of the weight for the entire company's sales growth? Answer: Not long. GM flipped the Baojun switch into high gear a little less than a year ago; there is no higher gear.
North America has to be fruitful for both Ford Motor and General Motors if growth is in the cards, and right now, it doesn't appear to be. As Ford's Chief Financial Officer Bob Shanks explained, the U.S. economic recovery is "maturing," meaning the now expects the U.S. economy to grow between 1.9% and 2.3% in 2016, down from its prior forecast for growth of between 2.1% to 2.6%. Translation: 2017 is going to be even tougher in the United States than 2016 looks like it will be.
If it's going to be tough for Ford, it's apt to be similarly tough for GM.... and it's not like GM can entirely fall back on China. Demand there is waning too, and General Motors will demonstrate once the Baojun cycle has run its full-year course.
Like GM, Ford is remaining optimistic in an effort to soothe investor worries. The recent drop in Ford & GM shares, however, says the market isn't buying it now that Ford painted a less-than-thrilling picture than General Motors did last week.