Ford, GM pitch new strategies; Wall Street snubs them

October 27, 2016 2:07 PM EDT

A Ford logo is pictured at a store of the automaker in Vienna, Austria on April 28, 2016. REUTERS/Leonhard Foeger/File Photo


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By Bernie Woodall and Joseph White

DETROIT (Reuters) - Ford Motor Co (NYSE: F) and General Motors Co (NYSE: GM) have worked all year to convince investors that they are no longer prisoners of the U.S. auto market cycle and have solid plans to fend off challenges from Silicon Valley interlopers.

This week, Wall Street looked at the Detroit companies' stronger-than-expected quarterly results and turned thumbs down.

GM, the largest U.S. automaker, reported record third-quarter net income on Tuesday, but its shares have fallen nearly 5 percent since then.

Ford shares sank more than 1 percent on Thursday, bringing their year-to-date decline to about 17 percent, or about $7 billion of the company's market capitalization.

(For graphic on Ford and GM earnings click http://tmsnrt.rs/1Nxqa9k)

The selloffs put more pressure on GM and Ford's chief executive officers to accelerate cost-cutting and buy back more shares. They must also make tough decisions between slashing production to prop up prices, or gunning for market share at the risk of reducing profit margins, analysts said.

Highlighting Detroit's problems with investors was the market's response to Tesla Motors Inc's (NASDAQ: TSLA) results. Late on Wednesday, the electric luxury car maker headed by billionaire Elon Musk announced its first profitable quarter in three years, with net income of $22 million.

By comparison, GM reported net income of about $2.8 billion and Ford, nearly $1 billion.

Shares of Tesla were up 4 percent in afternoon trading on Thursday, boosting the company's market value to more than $30 billion.

Wall Street has penalized GM and Ford shares this year because investors are convinced that a cyclical downturn is nigh for U.S. auto sales, which hit a record of about 17.5 million vehicles last year.

Ford said in July that the six-year auto boom since the economic crisis was over and that sales would erode from their 2015 peak while still plateauing at historically lofty levels.

Investors will watch as Ford and GM pursue contrary strategies for the fourth quarter in North America, where they generate nearly all of their profits.

GM said on Tuesday that it bulked up inventories at U.S. dealers by more than 110,000 vehicles during the third quarter, and executives said they anticipated strong demand to continue.

Ford, however, plans to cut fourth-quarter production in North America by 12.5 percent from a year earlier to keep dealers' lots from overflowing and avoid profit-sapping discounts.

The company is idling one shift next week at a Kansas City, Missouri, plant that makes the F-150 pickup, its best-selling vehicle and one of its most profitable models.

The company disclosed on Thursday that it was also closing a plant in Wayne, Michigan, for an extra two weeks before the end of the year to adjust production to demand. That plant makes the light-selling Focus compact car.

Ford's results reflect Detroit's challenges. Third-quarter net income fell by more than 50 percent because of declining sales in North America, higher recall costs and a costly and complicated introduction of a new pickup.

Still, the company backed its full-year earnings outlook and said it expected to generate cash this quarter after burning through $2 billion in the third quarter.

CEO Mark Fields urged investors on Thursday to value Ford based on its efforts to break into new markets such as ride sharing and autonomous vehicles that promise higher profit margins.

However, GM's $1.2 billion and Ford's $500 million of publicly disclosed investments in these businesses are dwarfed by the $16 billion ride services leader Uber Technologies Inc {UBER.UL} has raised in debt and equity, according to a Reuters analysis.

For now, said Ford Chief Financial Officer Bob Shanks, “what’s happening to the company is what’s happening in North America."

Ford's North American revenue fell 8 per cent in the third quarter.

At GM, CEO Mary Barra has matched or beaten financial targets for profit, share repurchases and return on invested capital agreed upon with activist investors last year.

Still, GM shares are down nearly 8 percent this year.

“There are just a lot of headwinds due to the idea of peak auto," Morningstar analyst David Whiston said. "GM’s just going to have to keep beating numbers and keep buying back their shares when it’s cheap like it is now."

(Additional reporting by Paul Lienert in Detroit; Editing by Lisa Von Ahn)



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