A sign advertises buying cars at a used car dealership in Arlington, Virginia February 15, 2022.
Saul Loeb | AFP | Getty Images
DETROIT — Since the pandemic began in early 2020, U.S. automakers and dealers have posted record profits as demand outstripped new vehicle supply amid supply chain issues.
With interest rates rising, inflation at record highs and looming recession fears, Wall Street is closely monitoring third-quarter earnings results and forecasts for signs of a slowdown in consumer demand.
“The atmosphere in the car is very bad. We get it. Higher interest rates, still high prices, low consumer confidence, a potential recession and European energy risk don’t make autos a friendly place,” RBC Capital Markets analyst Joseph Spak wrote in an investor note last week.
Spak said third-quarter earnings “should be mostly okay,” with a focus on company comments and revisions to forecasts. He said 2023 estimates for the sector would have to “go down significantly”.
RBC and other financial firms have signaled that the auto industry’s supply chain problems could quickly shift to demand problems.
US and European automakers’ profits are likely to fall in half next year as flagging demand leads to an oversupply of vehicles, UBS analysts led by Patrick Hummel told investors last week.
He said the overall auto sector in 2023 “is deteriorating rapidly, making the destruction of demand seem inevitable at a time when supply is improving.”
On October 10, Hummel was also downgraded General Motors and Ford engine, and predicted that it would take three to six months for the auto industry to go into oversupply. He said it will “put an abrupt end” to the unprecedented pricing power and profit margins automakers have enjoyed in the past three years.
The investment firm downgraded Ford to sell from neutral and GM to neutral from buy — causing both stocks to fall about 8% during intraday trade on Oct. 10.
The downgrades came weeks after Ford said around 40,000 to 45,000 vehicles were hit by parts shortages, mostly high-margin trucks and SUVs, which dealers couldn’t match. Ford also said at the time that it expected to book an additional $1 billion in unexpected supplier costs in the third quarter.
Jim Farley, CEO, Ford, left, and Mary Barra, CEO, General Motors
Reuters; General Motors
GM didn’t signal any such issues for the third quarter, but experienced similar issues in the second quarter that it expected to offset in the second half of the year.
GM CEO Mary Barra told Yahoo! Finance that the Detroit-based automaker is bracing for increased demand for its vehicles next year, but says it will be ready to continue investing in its electric vehicle plans “regardless of the environment.”
GM is expected to report third-quarter results before markets open on Tuesday, followed by Ford a day later after the bell.
Before Detroit’s biggest automakers report their results next week, is the electric vehicle leader Teslawhich enjoys cult status among investors, is to report on Wednesday after the close of trading.
CarMax fueled Wall Street concerns last month after the used-car dealer posted one of its biggest profit losses ever. In the second quarter of the fiscal year ended Aug. 31, single-store sales fell 8.3%, more than the 3.6% decline Wall Street was expecting.
Used car prices remain high, but Cox Automotive said wholesale prices at dealer auctions have fallen for four straight months. That could signal that consumers are fed up with near-record-breaking prices.
Citing CarMax’s results, JP Morgan analyst Rajat Gupta said sentiment for franchise dealer third-quarter results was “the most negative we’ve seen since the pandemic.”
“The sector is not immune to ongoing macroeconomic challenges and we are trimming our 2023 estimates significantly to reflect a mild recession and a new normal by 2025,” Gupta said in an Oct. 6 investor note.
A potential bright spot for the industry is low new car availability and sales. Even if there is an economic downturn, sales could still increase, although profits are expected to shrink.
lithium automotive on Wednesday reported the highest third-quarter sales and earnings per share in the company’s history, although the company missed Wall Street expectations for sales and earnings.
Adam Jonas, an analyst at Morgan Stanley, said that Lithia’s third quarter could be the last of this cycle’s “really, really, really good” unit quarter gross profits.
“While [CarMax’s] We believe weak fiscal second quarter results (reported a few weeks ago) are setting the tone for the used market [Lithia’s] The third-quarter failure should set the pattern for franchise players,” he said in an investor note on Wednesday.
Other major traders scheduled to report third quarter earnings include Group 1 automobile on October 26, followed by AutoNation, Asbury Automotive Group and Sonic Automotive on Oct 27
auto parts supplier
Looking at auto parts companies, which have seen significant increases in costs during the coronavirus pandemic, several Wall Street analysts expect continued growth this year, followed by single-digit growth, if not less, next year.
Suppliers are mostly paid after they supply parts or products to larger suppliers or automakers. Smaller suppliers that produce materials or parts for larger companies have come under particular pressure due to lower volumes, increased costs and labor shortages.
Gary Silberg, global head of automotive at KPMG, told CNBC that a significant number of suppliers are returning to OEMs and asking for support.
“Not only for them, but also for their suppliers. It’s basically a dance that everyone does all the time,” Silberg said. “They don’t have much influence, that’s the problem. It’s been a very, very tough 18 months” for smaller automotive suppliers.
A KPMG poll of more than 100 auto industry CEOs whose companies have annual sales in excess of $500 million found that 86% believe there will be a recession in the next 12 months and 60% said it will be mild and short.
Responses for the KPMG CEO Outlook survey were submitted from mid-July to late August.
Deutsche Bank expects auto parts results for the third quarter to come in line with Wall Street expectations. Analyst Emmanuel Rosner said in a note to investors on Wednesday that the company would prioritize suppliers over automakers over the next year, but said there was a potential risk of earnings downturns at smaller suppliers such as Auto American Axle & Manufacturing and dana inc
– CNBC’s Michael Bloom contributed to this report.