Bank of America Maintains 'Cautiously Bullish' View on Ford (F) and General Motors (GM) Ahead of Next Week's Earnings Reports: Strong Fundamentals Offset by Short-Term Risks

Stock News
Oct 17

According to insights from Zhitong Finance APP, both Ford (F) and General Motors (GM) are set to release their third-quarter earnings reports next week. In light of this, Bank of America Securities has issued a 'Buy' rating on both companies but has simultaneously lowered its target prices: from $62 to $61 for General Motors and from $14 to $13.50 for Ford. Bank of America noted that the retail sales and pricing performance of both companies in the third quarter has indeed exceeded market expectations. However, starting from the fourth quarter, tariffs, supply chain disruptions, and a slowdown in electric vehicle demand are expected to significantly suppress profitability, necessitating a downward revision of the overall earnings model for 2026.

Specifically, Bank of America pointed out that Ford and General Motors achieved year-over-year growth in U.S. retail sales of 8.2% and 7.7%, respectively, outperforming the overall industry growth of 5.2%. Meanwhile, both companies saw increases in their average transaction prices (ATP), with Ford's prices rising by 1.7% and General Motors by 4.8%. Additionally, General Motors' incentive spending as a percentage of vehicle price was only 6.1%, below the industry average, indicating stronger pricing power.

Bank of America forecasts that General Motors' adjusted earnings before interest and taxes (EBIT) for the third quarter will be $2.81 billion, which is 3.5% higher than market consensus, while Ford's EBIT for the quarter is projected to be $2.11 billion, exceeding expectations by 3.9%. However, entering the fourth quarter, Bank of America adopts a notably cautious stance on both companies. The primary risks facing General Motors include metal tariffs and those on medium/heavy trucks. Should a 25% tariff be implemented, Bank of America estimates that EBIT in 2025 could decline by $650 million. Ford, on the other hand, is anticipating a reduction of 120,000 to 150,000 units in F-150/250 production due to a fire at a key aluminum supplier's plant at the end of September. This incident could lead to an estimated $700 million loss in gross profit, prompting a significant downward revision of its fourth-quarter EBIT forecast from $1.79 billion to $1.33 billion, with EPS reduced from $0.30 to $0.21, falling well below market expectations.

Additionally, Bank of America has revised down its earnings expectations for both companies for 2026. For General Motors, the EBIT forecast has been cut from $13.4 billion to $11.8 billion due to a projected 3% decline in North American sales. As for Ford, the EBIT estimate was lowered from $9.7 billion to $8.0 billion, attributed to a slowdown in Ford Pro business gross margin improvement and continued losses in the Model e electric vehicle segment extending to 2027. The target prices are based on a projected EV/EBITDA valuation of approximately three times for 2026, which sits at the lower end of both companies' historical valuation range.

Regarding cash flow, Bank of America anticipates that General Motors' free cash flow will be $7.9 billion in 2025, sufficient to support ongoing buybacks and dividends. In contrast, Ford's free cash flow is projected to decrease from $4.0 billion to $2.5 billion in 2026 due to the impacts of the fire and tariffs, potentially limiting its future buyback capacity. Overall, Bank of America believes that the current valuations reflect most negative expectations, with projected EV/EBITDA for General Motors and Ford in 2026 at 2.8 times and 2.6 times, respectively, providing a certain margin of safety. However, in the short term, the implementation of tariff policies, the recovery of supply chains, and the trends in the electric vehicle market will remain key variables influencing stock price fluctuations.

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