The largest U.S. automotive manufacturers will see difficult terrain ahead as consumers continue to face inflationary pressures, UBS said. Analyst Patrick Hummel downgraded General Motors from buy to neutral, while Ford was moved from neutral to sell. He said the industry will move from unprecedented oversupply in the next three to six months. Plagued by inflation, he said consumers are looking away from big purchases like cars, a U-turn from during the pandemic when they were in limited supply and people were willing to pay above market value. “We believe this will likely lead to a paradigm shift from under- to oversupply and consequently, a price & mix led drop in margins,” he said of GM, which saw its price target slashed by a third to $38. “Despite -40% negative share performance ytd, the rapidly deteriorating top-down picture makes it unlikely that GM’s strong EV story can drive shares higher with a 6-12m view,” the analyst wrote. Automotive manufacturers will lose the pricing power they had during the pandemic, which will in turn halve earnings per share for most suppliers. UBS cut Ford’s earnings per share estimate by even more than most at 61%, noting the Lincoln maker will get closer to just breaking even on free cash flow and earnings before interest and taxes than its competitors. To be sure, not all brands and models will fare exactly the same. Luxury is in a better spot, Hummel noted, as higher-income consumers tend to fell inflation less sharply. Rising oil prices and tax breaks for electric vehicles through the Inflation Reduction Act could be a “breakthrough” year for GM’s electric vehicle line-up, though Hummel said it is unlikely to make up for shrinking demand elsewhere. “The overall sector outlook for 2023 is deteriorating fast so that demand destruction seems inevitable at a time when supply is improving,” he said. — CNBC’s Michael Bloom contributed to this report.
