DETROIT – General Motors and Ford Motor this week beat Wall Street's earnings estimates and maintained their 2022 forecasts to the surprise of many analysts. The reaffirmations occurred despite billions in additional commodity costs expected this year and an ongoing global supply chain crisis leading to lower production and sales. How is this possible? Strong pricing on new vehicles. It's being fueled by low inventory levels and resilient consumer demand. It's a trend that started following the early days of the coronavirus pandemic in 2020 and has continued to buoy earnings of automakers and dealers. It's a simple story of supply versus demand that consumers learn during their most basic economics lessons in school. The pricing power is something automotive executives seem confident will continue this year, however Wall Street analysts aren't so convinced. The skepticism comes amid record-high prices and a host of outside macro-economic factors, including inflation and lower consumer confidence as many fear a recession may be looming. "Like GM and other (automaker) so far, Ford shows unshaken faith in its ability to price inflation, a feeling not necessarily shared by investors," Jefferies analyst Philippe Houchois wrote in a note to investors. Strong demand Both GM CEO Mary Barra and Ford CEO Jim Farley this week said their companies have not experienced any signs of weakening demand for their products, despite growing economic concerns about a recession and average new vehicle prices being at- or near- record levels of $45,000-$50,000 since September. "It's something that we're watching very, very closely but, right now, we're seeing a pricing environment that's stronger than even what we thought at the beginning of the year," Barra told CNBC's Phil LeBeau on Wednesday. "That's a good place to be in with the strong demand as we work through the inflationary pressures." Farley made similar comments later in the day to CNBC's Jim Cramer on "Mad Money:" "We have a lot of demand for our product … We put a lot of pricing in the market, and it stuck." Ford largely expects its pricing power combined with an expected increase in production to offset $4 billion in raw material headwinds, up from a previous forecast of $1.5 billion to $2 billion. It's a similar story at GM, which this week doubled its forecasted commodity costs to $5 billion in 2022. Customer revolt? Morgan Stanley analyst Adam Jonas is concerned there may be a revolt from both auto suppliers and consumers regarding pricing, leading to decreased profits and less pricing power for automakers such as GM and Ford. "Investors should make room for this 'pay-back' and 'pay-up' to their Tier 1 suppliers in the remaining quarters of the year, placing future earnings at risk," Jonas said in an investor note, describing Ford as a "stock in limbo" due to the current macro backdrop. Jonas also noted: "Pricing tail winds continue, but how much more can the consumer take? After another $1.7bn of net pricing tailwinds in the quarter, we are incrementally more concerned about a buyers' strike in autos. A concern that goes well beyond Ford but for the entire auto industry." In addition to recent price increases in everything from aluminum and steel to freight – all important for automakers – the industry has been battling a shortage in semiconductor chips for more than a year. GM's 2022 guidance includes pretax adjusted earnings forecast of between $13 billion and $15 billion. That compares to Ford's forecast of between $11.5 billion and $12.5 billion. "We worry the company's unchanged 2022 guidance could now be even more aggressive, in light of steep inflationary pressures," said Deutsche Bank analyst Emmanuel Rosner in a Thursday note called "Can Ford really get another $2.5bn of pricing/mix benefit this year?" Rosner made similar comments on GM in a separate note: "Any weakening in consumer demand could rapidly result in pricing pressure and create downside risk to estimates," he said. "Even if this doesn't happen imminently, we believe investors could stay on the sidelines while waiting for the pricing shoe to drop." – CNBC's Michael Bloom contributed to this report.
Ford F-150 Lightning trucks manufactured at the Rouge Electric Vehicle Center in Dearborn Michigan.
Courtesy: Ford Motor Co.
DETROIT – General Motors and Ford Motor this week beat Wall Street's earnings estimates and maintained their 2022 forecasts to the surprise of many analysts.
The reaffirmations occurred despite billions in additional commodity costs expected this year and an ongoing global supply chain crisis leading to lower production and sales. How is this possible? Strong pricing on new vehicles. It's being fueled by low inventory levels and resilient consumer demand.
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