Ford-GM gap isn’t as wide as it looks

DETROIT — Detroit’s two largest automakers are heading in opposite directions so far this year, with General Motors’ record profits defying signs of a U.S. market slowdown, while Ford spends big on recalls and on technology it hopes will pay off later.

Their first-quarter results — GM earnings up 34 percent, Ford earnings down 35 percent — reflect the companies’ strategies to grow sales today and to stay relevant in the future, along with the fact that GM is at the peak of its product cycle while Ford weathers a lull.

They aren’t necessarily emblematic of how each company will look later in the year, when GM will halt some of its most profitable plants for retooling and Ford anticipates hitting its stride. But GM does expect to have the better year, saying it will meet or beat its 2016 performance, even as U.S. industry sales soften.

“GM is really starting to get the scale that a company that makes 10 million vehicles a year should get,” said David Whiston, an analyst with Morningstar Inc. “They’ve got all the crossovers getting redone this year, and then new pickup trucks next year. GM dominates the full-size SUV segment, too, and those are extremely profitable vehicles that are well in demand right now.”

Across town at Ford, which had its best quarter in company history a year earlier, executives say last week’s earnings report doesn’t tell the whole story. They said Ford’s pretax profit for the rest of 2017 will be about even with or possibly better than a year earlier. Including the first quarter, though, Ford expects to fall short of last year’s $10.4 billion pretax profit, second-best in company history.

“We know the timing of our spending regarding engineering and building prototypes and we also know our launch cadence,” Joe Hinrichs, Ford’s president of the Americas, said in an interview. “We’re pretty confident that we understand our costs for the year, and we mentioned that the large cost increases in the first quarter are what you’ll see for most of the year.”

GM plant downtime

In contrast, GM’s results will take a hit this year, when it has scheduled 10 weeks of downtime at multiple North American factories to retool for redesigned pickups and crossovers. CFO Chuck Stevens said the downtime will happen in the third quarter and reduce output by about 60,000 vehicles.

Because automakers book revenue as vehicles are shipped to dealers, rather than when dealerships sell them, the downtime could have a significant impact on GM’s third-quarter performance. It’s also boosting GM’s results now, as the company’s dealerships amass extra inventory in preparation.

Stevens said GM will have “another strong year” overall but warned that the third quarter will be “weaker than normal.”

Ford’s first-quarter profit was pinched by charges for recalls, continued investment in new mobility services and higher parts costs for some 2016 launches. Hinrichs said prices for steel and other materials rose more than expected.

“We’ve seen some rising commodity costs and we’re responding to that with cost reduction actions across the company,” he said.

Ford doesn’t expect any more growth in U.S. sales, but it’s benefiting from strong demand for pickups and SUVs — segments in which Ford is investing and updating its products, including the recently redesigned Super Duty and freshened Escape.

“We’re assuming the industry in the U.S. comes in a little less than last year, but still in the mid-17 million range,” Hinrichs said. “We’re very confident the plan we have in place to deliver the $9 billion of pretax profit is a good plan and one we’re working on intensely.”

Wall Street doubters

Amid the differences, one common trait between Ford and GM is that neither has gotten much respect on Wall Street lately. Both companies’ shares have been sluggish, and last week’s results did little to generate enthusiasm among investors.

For GM, it was the eighth consecutive quarter in which its results topped analysts’ expectations. Brian Johnson, an analyst with Barclays Capital, called the performance “a solid step forward in disproving its doubters,” but shares of GM barely moved.

“It’s not fair, as we believe GM deserves to be better rewarded for overall strong results and execution,” Johnson wrote in a note to clients Friday, April 28. “But unfortunately sometimes the prevailing market sentiment can be overly difficult to fight.”

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