The stage was set for Detroit automakers General Motors (GM -0.04%), Ford Motor Company (F 0.08%), and Fiat Chrysler Automobiles (FCAU) to post strong second-quarter results. The economy is strong, vehicle pricing is moving higher, and Americans continue to buy highly profitable SUVs and trucks. Naturally, with just about all signs pointing to a solid second-quarter result, things went terribly.
Here are some key points for investors who couldn't keep up on a wild, wild Wednesday in Detroit:
A major loss
For Fiat Chrysler (FCA), Wednesday was a much bigger loss than figures on paper can show. The former CEO responsible for turning around FCA's business, Sergio Marchionne, passed away, leaving a major void in the entire industry's leadership. With impossibly large shoes to fill, CEO Mike Manley took the helm with a list of challenges to explain to investors and Wall Street.
FCA announced that revenue increased 4% to $33.91 billion, but recorded a 35% drop in second-quarter profit, compared to the prior year. Adjusted earnings also dropped 9% to $1.15 billion, and results in addition to the ensuing CEO transition sent shares 12% lower Wednesday.
One of the forces behind that loss was surprisingly weak China results. An unintended consequence of China cutting import duties on certain vehicles in July resulted in consumers opting to wait on duty reductions to purchase Maserati and Jeep vehicles.
Manley has his hands full during the second half of 2018. FCA won't have full production of the Ram 1500 DT until the fourth quarter. Add to that a struggling Jeep brand in China -- which was a key component of its five-year plan -- and trying to maintain stability amid a transition from Marchionne. With all those factors in mind, management lowered full-year revenue guidance from $146.2 billion to between $134.5 billion and $138.9 billion.
No pulled punches
It was a rough quarter for the folks at the Blue Oval, real rough. Ford reported a 48% drop in net income to $1.1 billion, lowered full-year guidance, and announced that global restructuring efforts could result in charges of $11 billion over the next three to five years. Ouch!
Unlike GM, Ford didn't blame weaker guidance on President Trump's tariffs on steel and aluminum. But it did take a tariff hit during the second quarter and expects a larger hit in the back half of 2018.
Image source: Ford Motor Company.
Ford's business faced headwinds with a fire at a key supplier's factory leading to an eight-day shutdown of production for the highly profitable F-150 truck -- more important than many realize. The shutdown and related costs hindered Ford's North American profit by $591 million. But on the bright side, the automaker will be able to make up lost production as the year drags on. Another headwind was Ford's wholesale shipments in China plunging 26% during the second quarter, which wiped out profitability with its Chinese joint ventures.
Ford's question-and-answer session saw no punches pulled. Morgan Stanley analyst Adam Jonas was first up, and wondered aloud if CEO Jim Hackett would be around to present during investor day. Jonas also was brutally honest with Hackett and CFO Bob Shanks, saying, "I really do hope you can reconsider the communications strategy, because it's just not good enough, Bob."
Jonas hit a sore spot as Wall Street has grown frustrated with vague comments, strategies, and details from Ford about its vision. And after the conference call, the stock dropped to $10 per share, a level Ford hasn't seen since 2012, when the automaker was still rebuilding a growth story fresh out of the recession.
Tariff woes
GM's revenue fell ever so slightly to $36.8 billion during the second quarter. And while the automaker topped Wall Street estimates for a 13th consecutive quarter, with $1.81 earnings per share checking in above analysts' estimates of $1.78, it couldn't avoid lowering its full-year earnings forecast.
Detroit's largest automaker lowered its full-year EPS from a $6.30-to-$6.60 range down to $6, and full-year free cash flow from the mid $5 billion range down to $4 billion. GM put much of the blame on indirect impact from the Trump administration's tariffs on steel and aluminum. The results sent GM's stock 5% lower Wednesday.
Yes, GM sources a vast majority of its steel and aluminum domestically, but the 25% steel tariff and 10% on aluminum caused domestic suppliers to increase prices to reach equilibrium with demand. That surge in domestic pricing is expected to add $1 billion in costs to GM's operations in 2018, almost double the previous estimate. In addition to the tariff woes, GM's business was also hurt by foreign exchange rate changes, mostly in South America. And the company saw lower production of highly profitable full-size pickups amid plant changeovers for the next-generation Chevy Silverado and GMC Sierra, which are still on track to launch as scheduled.
Wall Street isn't impressed
"It was a really bad day," Morningstar.com analyst David Whiston said, according to Automotive News. "There are a lot of factors beyond their control. In addition to all of that, we're at the top of the auto cycle, and investors just aren't interested."
That quote best sums up Detroit's no good, really bad second quarter. Despite a strong economy in America, the most lucrative auto market in the world, and an increasingly profitable sales mix favoring SUVs and trucks over cars, uncertainty with tariff impacts and the cyclical nature of the business have all but run off Wall Street, yet again.
