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Ford and General Motors Enter a New Phase of Uncertainty on Prices and Demand

Jeenah Moon | Bloomberg | Getty Images
  • Ford and General Motors report earnings this week.
  • Automakers have reported record results amid a tight supply of new vehicles and strong demand.
  • Ford cut prices on its electric Mustang Mach-E, weeks after EV leader Tesla slashed its own prices.

DETROIT – Let's talk about pricing power.

At least, General Motors and Ford Motor are this week as they report fourth-quarter results and 2023 guidance, with Wall Street watching for signs of weakening consumer demand and a tougher pricing landscape.

Either issue would mean lower profits this year for the automakers. GM revealed the earliest signs of that pressure on Tuesday, reporting net income down slightly year over year and dropping profit margins. Ford is expected to report EPS of 62 cents when it reports earnings on Thursday, more than doubling the 26 cents it posted a year earlier, according to Refinitiv consensus estimates.

Automakers have reported record results in recent years amid the tight supply of new vehicles and resilient consumer demand. They have banked on sustained pent-up demand as inventory levels normalize, hoping to avoid heavy discounts or incentives to move vehicles.

But that scenario is slowly neutralizing. And that leaves new vehicle prices and profits in flux.

Cox Automotive reports the Detroit automakers have among the highest inventory levels in stock in the industry, noting vehicle numbers differ greatly by brand. Plus, incentives are slowly rising.

There's overall concern that the pent-up demand was largely eroded amid recessionary fears and affordability issues resulting from rising interest rates and record-high prices of nearly $50,000 on average for a new vehicle.

Ford on Monday cut the starting prices on its electric Mustang Mach-E, weeks after electric vehicle industry leader Tesla slashed its own prices.

Duncan Aldred, head of GM's GMC brand, signaled the truck and SUV brand expects to continue increasing its average transaction price, which he said hit a new record of more than $63,405 during the fourth quarter.

Those rising transaction prices are due in part to redesigned pickups and the launch of the electric Hummer SUV, which tops more than $110,000. GM started production of that SUV this week at a plant in Detroit, the company said during a media roundtable Monday.

'Demand destruction' watch

Wall Street has been bracing for a "demand destruction" scenario for the last several quarters, which means much of its focus this week is on the automakers' 2023 guidance.

GM on Tuesday guided to adjusted earnings per share for the full year 2023 of between $6 and $7, representing a decline from 2022 profit. That still came in above Wall Street projections for the period, however.

Ford's 2023 EPS is expected to fall by nearly 16% compared with 2022, according to Refinitiv consensus estimates.

"We estimate GM and Ford could see a notable decline in profitability this year, as earnings can be weighed down by vehicle pricing declines and losses from growing EV volumes," Deutsche Bank analyst Emmanuel Rosner wrote in an investor note earlier this month.

Rosner said that guidance risk is already well anticipated and shouldn't dent the stocks, however.

Morgan Stanley's Adam Jonas expects the deteriorating pricing, lower-cost vehicle mix and declining earnings from automakers' financial arms to "potentially initiate restructuring and cut 'special projects' to defend the bottom line," he said in a note to investors last week.

Amid persistent recessionary fears, automakers have yet to announce substantial layoffs or cost cuts similar to those that have hit other sectors, particularly tech, hard. Wall Street will be eager for an update on those fronts this week.

Ford reportedly plans to cut up to 3,200 jobs across Europe and move some product development work to the United States, Germany's IG Metall union said last week. GM, which sold its European business in 2017, has not announced such actions.

GM and Ford have said they will continue to invest in EVs regardless of macroeconomic factors. Any change in those plans would be notable for investors as well.

— CNBC's Michael Bloom contributed to this report.

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