Why Ford, GM, Lucid and Rivian stocks fell today
Recession fears wreaked havoc on the stock market for another day on Friday, and auto stocks in particular took the chin, with Ford (F -5.74%) and General Engines (GM -6.69%) down 5.8% and 6.3%, respectively, as of 2:30 p.m. ET. Electric car stocks are not immune to selling, with Lucid Group (LCID -4.05%) down 3.6%.
On the bright side, shares of the electric truck maker Rivian (RIVN -1.35%)which fell just short of traditional automakers earlier in the day, was down less than 1% at 2:30 a.m.
The main reason car stocks are down today has to do with the economy. For example, rising inflation and the efforts of central banks to contain it by raising interest rates have a the wall street journal journalist noting that “the more the Fed raises rates, the greater the risk that it will go too far, tipping the economy into a recession”.
This would obviously not be good news for auto stocks, for more than one reason. A recession means tough economic times that rob consumers of purchasing power, so they may be less inclined to buy new cars. In addition, rising interest rates are making it more expensive for consumers to buy a car and for automakers to service their debts.
Meanwhile, adding to automakers’ troubles, Ford warned investors earlier this week that its supply chain is still in a mess, which likely means its peers are too. Ford said it expects to have 40,000 to 45,000 cars by the end of the third quarter that it cannot finish building (or sell) due to a lack of needed parts. Additionally, Ford management has complained that the parts it can obtain cost more in this inflationary environment, adding up to $1 billion to its input costs. This would subtract $1 billion from its profits unless it can pass those costs on to consumers.
All of this paints a rather gloomy picture for automakers, which risk seeing their profit margins squeeze at both ends as the economy weakens. For one, their costs are rising due to coin inflation and the higher cost of debt. Ford’s balance sheet shows more than $102 billion in net debt, and GM isn’t much better off with $90.6 billion more debt than cash on its books. On the other hand, sales could be impacted because consumers have less to spend.
Granted, Rivian and Lucid look a little healthier, with more cash than debt on their balance sheets. But none of these new automakers are profitable yet, and their cash flow is steadily shrinking.
It’s for this reason – dwindling cash reserves and non-existent profit margins – that I always distance myself from endorsing Rivian or Lucid over Ford and GM. At valuations of just seven times earnings (Ford) and five times (GM), I continue to believe that the major automakers offer the best profit prospects for investors as the economy heads into recession.
And in the short term, at least, I lean more towards Ford than GM, mainly because the former is free cash flow positive, and the latter isn’t.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.