On this bonus episode of Industry Focus: Energy, host Nick Sciple talks with senior auto specialist John Rosevear about the most recent earnings reports coming out of Ford (NYSE:F) and GM (NYSE:GM). Ford has an exciting new partnership with a scrappy electric-truck maker. GM's investment in Lyft (NASDAQ:LYFT) just got a lot more tangible. Ford's nebulous improvement plan is starting to take shape, and the market really seems to like that. Some factory downtime means brighter numbers in GM's future.

Tune in to hear the most important numbers and trends, and what they mean for the companies' long-term stories.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on May 4, 2019.

Nick Sciple: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Saturday, May 4th, and we're talking Ford and GM earnings. I'm your host Nick Sciple, and today I'm joined by Motley Fool senior auto analyst John Rosevear via Skype. How are you doing, John?

John Rosevear: I'm doing well! How are you?

Sciple: I'm doing good! May the Fourth be with you! Since I had you in the studio already -- we did our Tesla podcast on Thursday -- we thought we'd go ahead and prerecord a bonus episode, because we have Ford and GM earnings and I know you follow these companies very closely. I want to hit these pretty quickly for our listeners, so they can get your thoughts.

First, I want to go into Ford. Ford reported earnings last week. Adjusted operating profit, up 12% to $2.4 billion. Adjusted EPS [earnings per share] $0.44, beat consensus estimates of $0.27. They're ramping investments in autonomous vehicles and mobility. What should we be looking at from this earnings report? How should investors feel about it?

Rosevear: Back up a little bit and set the context here. Ford CEO Jim Hackett, who came in a couple of years ago, has been working on improving Ford's fitness, meaning its global profitability, as well as its ability to respond to changing trends and things in the marketplace quickly and nimbly. But also a global, what they call a redesign of the business: Ford folks use that word to distinguish it from just an ordinary restructuring. We're not just going through and cutting 10% or something like that, we're really rethinking what we're doing here. For a long time, it wasn't clear where he was going with that and what that really meant, and Ford's stock stumbled and languished, as we saw. More recently, they've started saying, OK, here's what we're doing, and here's how we expect it to play out.

In the first quarter, it was "we've got a lot of work left to do," but now you can see a little bit of progress that we've made here. The wholesale shipments were down 14%, but adjusted EBIT [earnings before interest and taxes] was up. Net income did well. It was down a bit because of some special items. But looking underneath the special items, which were mostly restructuring charges, they did OK, and they did more OK than people expected. EBIT margin in North America was 8.7%. That's a widely watched number, which is often interpreted as, how profitable are the trucks. As you get rid of things like Fiestas and Focuses, which have very thin margins, the profits on everything else look a little better. We'd love to see the EBIT margin in the 10% range in North America long-term. I think we will. But right now, we're in a very late-stage market where rivals have boosted incentives on pickups, where Ford is in the process of renewing its crossover and SUV lineup, which matters a lot. In the first quarter, they were just starting to roll out the new Explorer; the new Escape comes later this year. Those are hugely selling products. The numbers are very big, and the profits are very significant. The profits on the new models will be better than on these old models because as vehicles age, you have to discount them more to sell them. That's just how the business works.

They're putting more emphasis on their commercial vehicles, their transit vans. Overseas, the Ranger is also considered a commercial vehicle, so that as well. I think investors who are new to autos hear "fleet sales" and go, "Oh, God, fleet sales are low-margin." Yes and no. The fleet sales that are low-margin are the sales to rental-car fleets. Commercial-vehicle sales are actually quite profitable; they're good business. It's business that Ford is a leader in the U.S. and Europe, and that Ford fights to get more of. It's good, profitable business to sell 200 pickup trucks to Comcast. It's good profitable business to sell 300 delivery vans to whoever. This is good, profitable, margin-enhancing business. And Ford has well-respected products. This is another area where they're investing more money and effort. That is also helping margins, not just in the U.S.

North America, they earned $2.2 billion before taxes; that was up $270 million from a year ago. They lost a little more in South America than they did in the first quarter last year. But they showed strong cost improvements. They're fighting inflation, particularly in Argentina, which is a big market for them. They're doing some restructuring down there. They're closing a heavy truck factory that has not been sufficiently profitable. They turned a profit in Europe after some big losses last year; they earned $57 million. It's not much, but it's more progress than anybody expected. They lost $128 million in China, which is a significant loss, but it's a lot less than anybody expected. Et cetera, et cetera.

It's incremental progress. The takeaway with Ford is, they showed incremental progress. Yeah, OK, rolling out new products is helping. Deemphasizing sales of low-margin hatchbacks is helping. Cutting costs and streamlining the organization is helping. I think Wall Street looked at this and said, "OK, all right. Now we see where Ford is going, and that this stuff is working." And the stock has been up nicely; the stock was up like 10% the next day.

Sciple: Yeah, it got a big pop following earnings. The other thing that's been significant about Ford -- we got news in the past week -- is that Ford is going to invest $500 million in electric-vehicle developer Rivian. They've been developing electric trucks, electric SUVs. They're going to partner with Rivian on an all-new battery electric vehicle, using Rivian's skateboard platform as the foundation of their vehicle. As you see Ford making this new investment in Rivian, how does that fit into their strategy? How significant is this for the business and for Rivian, for that matter?

Rosevear: It's a somewhat big deal for both sides. On some level, this is forward-looking at a potential threat and turning them into a partner.

Rivian is determined to show that it's not Tesla. [laughs] I mean, they're based in Michigan. They do have offices out in Silicon Valley. But they've made a point of being based in Michigan and building relationships with the existing auto industry, as if to say, "We know we're a vehicle company. We're producing a different cutting-edge vehicle, but we know we're a vehicle company. We're going to do business with the industry suppliers. We're going to buy the good seats. We're going to do this and that."

And for them, a relationship with Ford -- at the point where the Rivian guys are sitting around and going, "Holy crap, how do we get our vehicles into production?" -- having Joe Hinrichs from Ford, who is frankly one of the world's experts on mass-producing vehicles cost-effectively -- you look at all the money they're making on the F-series trucks at Ford, Joe Hinrichs has a lot to do with that, and his team. He's joining Rivian's board. For Rivian, that's huge. Now they have a real, legit, honest-to-goodness pickup-truck mass-producing expert on their board. [laughs] Somebody who can really help them do this.

For Ford, it's, OK, we get a look at a different technology. Maybe this becomes a more significant thing in time. If Rivian is stealing sales from us, at least we're making some money off the sales because we own a piece of Rivian. [laughs] It turns a potential threat into a partner really early on.

Rivian's show vehicles are impressive; the designs are impressive. They do own a factory in Indiana, I think, which I believe was an old Mitsubishi factory that they bought. They have the space. Obviously, they don't have the tooling or anything like that in place yet. They're hoping to get their first salable vehicles off the line by the end of 2020. So the horizon here is fairly long, but still somewhat aggressive.

And clearly, to me anyway, Rivian was at the point of thinking about, OK, we need some help getting our trucks into production. This seems like R.J. Scaringe, the very bright CEO of Rivian, and Bill Ford developed a rapport. Bill Ford is the executive chairman of Ford, of course, I believe the great-grandson of Henry Ford. It sounds like they developed a rapport. Bill Ford has long been Ford's green voice: sustainability, urban planning, reducing traffic jams, reducing congestion, reducing pollution, reducing accidents, and so forth. He's the keeper of that flame at Ford; that's the role he's chosen for himself, or one of the roles he's chosen for himself. And so I think R.J. Scaringe and Bill Ford developed a rapport, and this deal came out of that. The Rivian folks felt like, OK, Ford is a company that gets us, and we can work with them. If we are going to need a relationship with one of the big legacy OEMs [original equipment manufacturers], Ford is a company that gets us. It's obviously a company that's deeply involved in the truck space, a leader in the truck space, but they can help us emerge into the truck space, too.

My first take on this was, I think it's an interesting, good deal for both sides. I'm still there with that.

Sciple: The leader in gasoline-powered trucks partnering with what appears to be the early leader in EV trucks is really interesting to see.

Rosevear: Ford has a hybrid truck coming, and they've said they've started working on a fully electric F-150. Ford's going in the same direction. Rivian's truck is a super truck. Its price point starts at $70,000. It's fast, it's got a whole bunch of rugged off-road hardware. I mean, it's obviously designed to be a very premium product. I think Ford might look at that and say, OK, we come in underneath with a $50,000 F-150 that has 98% of the capabilities, and everybody makes money. [laughs] There's room for both here.

Sciple: OK. Then, John, quickly, let's go over GM's numbers, quick thoughts here. Their net income moved up significantly to $2.1 billion, [and] $1.41 adjusted EPS beat consensus estimates of $1.10. But they did disappoint on revenue. As you look at this earnings report, what stands out to you -- what should investors be paying attention to?

Rosevear: The story at GM is somewhat like the story at Ford. There's been more clarity at GM about what they're doing, and the moves have been less drastic. But GM is in the midst of rolling out all-new pickups. They had Crew Cab versions out in the first quarter -- started production of the rest, I think, toward the end of March -- so not a significant presence there. They're selling a mix of old and new trucks. The new trucks, they're making quite good money on them. The pricing has been strong, despite some incentives that have been talked out. They're getting about $5,800 more per truck than they were on the outgoing model equivalents in the first quarter last year, which is a significant gain and will flow to the bottom line.

GM has been really riding the line of new-generation crossovers it started rolling out a few years ago. The latest things are the Cadillac XT4, which is a compact premium crossover they launched last year, and the Chevrolet Blazer, which is a larger five-passenger crossover that came out a little while ago. These have all helped boost margins. They're much nicer products than the older ones, which means they sell at higher prices. And GM designed them for profitability, streamlining the order sheets to make them less complicated to manufacture.

The other big part of the story here is: You may remember a few years ago that GM spent $500 million to buy a stake in Lyft. And, guess what, Lyft went public, so they revalued it. They're applying discounts when they revalue it on their balance sheet. But that added about $300 million here, Lyft going public.

Sciple: So, again, similar stories we saw with Ford: navigating some of the contraction in China, but really seeing pickup in demand for their new SUVs and crossovers that is really driving a higher margin, as well as new partnerships that are starting to help the business.

Rosevear: The other thing with GM is, they're in a different spot from Ford in their product cycle. CFO Dhivya Suryadevara said that, from an earnings perspective, the first quarter will probably be the worst of the year because they had some significant downtime at the factory that makes the big SUVs. These are things like the Cadillac Escalade and the GMC Yukon, the Chevy Tahoe and Suburban. These are super-profitable products. As they roll the rest of their trucks onto the all-new architecture that they developed for the Silverado and Sierra pickups that are already out there, they will be rolling out all-new SUVs at some point, too. They had some downtime at the factory to start to do some of the work to make the next-generation product. So they lost some production, so they lost some sales. There is some planned downtime at their pickup factory that makes the heavy-duty pickups, the 2500 and 3500 pickups, the big work trucks. Those are next to come out. But then, in the third and fourth quarters, they expect those to be better than both the first and second quarters, as production of all these new products starts to hit its stride and the dealers have supplies of them, supply the full line of all-new pickups and so forth, and they're able to sell more of these profitable products.

Sciple: Yeah, something to continue to watch. Both these companies seem to be carrying out some strategies to bring down costs and move to more higher-margin vehicles that seem to be paying some dividends -- something we'll continue to watch as things go forward. John, thanks again for coming on the show! I look forward to having you on again soon!

Rosevear: All right! Thanks for having me!

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for his work behind the glass! For John Rosevear, I'm Nick Sciple. Thanks for listening and Fool on!