Ford reported earnings this week, and they speak not only to its own weakness, but to the headwinds facing the US car industry. Full year 2018 earnings declined considerably from the previous year on weak North American sales, as well as a poor performance in Europe and China. Ford’s CEO continues to promise that plans for a major restructuring will be released soon, but as yet, investors have been given little more than promises for change.
FINSUM: Ford is hurting worse than GM, but both companies are facing product lineups that are mismatched to current customer demand, which means the next couple of years are going to be challenging.
The US auto industry has a huge problem, and if you’ve ben paying attention, you should already be starting to become aware. Consider this: the US economy has been doing great and the employment market is tight, yet US automakers are closing factories and cutting their workforces left and right. The disconnect comes down to an important issue—US auto factories are not aligned with customer demand. Traditional sedans are rapidly losing market share, yet US auto plants are set up to produce them. SUVs are taking over American car purchases, but automakers aren’t equipped to meet demand.
FINSUM: This is an eye-opening issue, but surely the problem of shifting demand is better than demand falling in aggregate. It does seem like there are going to be some rough years as automakers play catch up.
The big market rout has left no shortage of stocks trading at large discounts to their previous valuations. The important question is which ones are actually a good value given the eruption in markets. With that in mind, here are four well-known names to take a look at. They are General Motors, CVS Health, Macy’s, and American Airlines. GM and AA are trading at near 5x earnings, the latter despite a thriving business. AT&T is interesting too, as shares have fallen 20% in the last year, and the dividend has swelled to 6.7%.
FINSUM: This seems like a good chance to pick up some healthy stocks that have been heavily dented by a selloff, but are poised to recover. We particularly like American Airlines and AT&T.
There have been a lot of recession indicators lately—the yield curve, slowing growth, the end of the tax cut boost. However, one that really catches the eye this week is GM’s massive job cuts. The company is shedding over 14,000 jobs across many states, including in Michigan, Maryland, and elsewhere. The cuts amount to 15% of its work force. The move comes in response to slowing sales and changing tastes. All of the plants being closed make parts for passenger cars, not the SUVs that have become much more popular with buyers.
FINSUM: This could either be the canary in the coalmine, or it could be a response to the very specific automation pressures that are hitting the car market.
An absolute nightmare befell the auto sector yesterday. While the market has been increasingly concerned about the effect of Trump’s metal tariffs and the counter-tariffs from trading partners, yesterday’s meltdown was sparked by poor earnings. It started with GM and Fiat Chrysler, both of whom got walloped on weaker than expected earnings. Then Ford came in with an $11 bn restructuring plan that seemed to contradict the promised $25 bn of cuts it had previously announced. What was odd about the numbers is that they come when the economy is doing quite well. “To have a quarter like this is striking … Every time they turn over a rock, they find more problems”, says one auto market analyst.
FINSUM: Between looming tariffs and weak underlying sales, car companies seemed to be facing a definite reversal of fortunes after several years of good performance.