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GM, Ford earnings to be hit by trade woes

A Chevrolet Sonic vehicle moves along the production line at the General Motors Co. Orion Assembly Plant in Orion Township, Michigan. Photographer: Jeff Kowalsky/Bloomberg

By BLOOMBERG

NEW YORK • The US auto sector has suffered a bumpy ride so far this year, and the road isn’t expected to get much smoother any time soon.

Trade tensions and drawn out tariff talks have weighed down investor sentiment for the sector, which relies on an international supply chain.

On top of that, demand for cars is slowing in the US, forcing automakers to overhaul their strategies and pour money into research and development, put t ing a squeeze on margins.

“While we believe that sales and production are plateauing with modest downside pressure, and that mix in the US will remain strong, this will be offset by deterioration in pricing and rising interest rates,” Buckingham Research Group analyst Glenn Chin wrote in a note dated July 19. “The costs of many commodities, should they hold at current levels through 2018, are significantly higher than their 2017 averages, and could be an earnings headwind,” Chin added.

Here’s what analysts and investors will be watching when General Motors Co (GM) and Ford Motor Co report second-quarter (2Q) results yesterday.

Expectations are muted for both GM and Ford’s full-year outlook, with consensus for GM’s earnings standing at US$6.38 per share, compared to the company’s guidance of a “mid US$6” range. For Ford, analysts on average expect 2018 profit of US$1.51 per share, compared to the carmaker’s outlook of US$1.45 to US$1.70.

The impact of the fire at a Ford supplier’s factory in May that halted production of the company’s biggest moneymaker, the F-150 pickup, is expected to hurt results. RBC Capital Markets analyst Joseph Spak said consensus estimates don’t fully reflect the impact from the fire.

“Management estimated that the F-150, F-250/350 downtime would weigh on 2Q earnings per share by about 12 cents, however, consensus earnings per share only fell by about six cents after the announcement,” Spak wrote in a note dated July 13.

The nearly constant bickering over trade and tariffs has been an overhang for the entire sector for the past couple months, and any update or detail can help to relieve some investor angst.

“We don’t expect commentary on potential economic impact or volume, but look for some colour on tariff cost impact,” RBC’s Spak said.

The US is deciding whether to impose tariffs of as much as 25% on car and car-parts imports as part of President Trump’s bid to reduce the US$566 billion (RM2.3 trillion) US trade deficit. The proposal has drawn opposition from Japan, Mexico, Canada, Germany and US automakers, among others.

The American Automotive Policy Council, which represents GM, Ford and Fiat Chrysler Automobiles NV, estimates that a 25% levy would amount to an US$83 billion tax burden on the US auto industry and consumers.

Costs of raw materials for the sector have risen steeply this year, and management commentary may affect valuations of auto suppliers.

“The price of oil, steel and copper, etc, are all significantly higher now than their average over the past 12 months,” Buckingham’s Chin wrote, adding that US tariffs on commodities will also likely push prices higher.

“While some suppliers have pass-through arrangements on certain commodities, there is often a lagged effect,” Chin said.