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General Motors
UBS upgraded General Motors to a Buy rating (From Neutral) and raised their 12-month price target on the auto stock to $44.00 (From $41.00). This upgrade is grounded in GM’s consistent performance amidst a highly uncertain and volatile economic landscape, notably maintaining an 8-10% GM North America (GMNA) EBIT-Adjusted margin.
GMNA has demonstrated remarkable resilience in its profit margins, even amid substantial investments in electrification. UBS expects this resilience to persist, despite pricing pressures and the margin impact of electric vehicles. Several factors contribute to this outlook, including a stable volume of high-margin full-size trucks, cost-saving initiatives, and tax credits associated with IRA battery production.
While UBS predicts GMNA’s EBITDA for 2025 may fall below consensus estimates, the market is pricing in a significantly larger gap, approximately 30% below UBS’s 2025 GMNA EBIT-Adjusted forecast. This divergence can be attributed to concerns about potential complications arising from negotiations with the UAW and uncertainties surrounding GM’s EV strategy. However, these concerns have led to a reduced valuation, which UBS views as an attractive risk-reward opportunity for potential investors.
In the near term, assuming a strike does not occur, UBS analysts foresee GM reporting better-than-consensus earnings in the second half of 2023. Even if a strike were to take place, they regard the impact of lost earnings as “transient.” While labor costs are expected to rise, UBS believes that the negative impact has already been incorporated into GM’s management objectives, and the company has demonstrated its ability to effectively manage costs, potentially allowing for counterbalancing measures.
Ford Motor Company
UBS has also upgraded Ford Motor to a Buy rating (From Sell) and raised their 12-month price target on the auto stock to $15.00 (From $11.00). Ford’s valuation has faced headwinds due to recent delays in their EV transition and concerns about a potential UAW strike. However, UBS analysts believe the company’s earnings will be more resilient than expected, providing what UBS sees as a tactical entry point.
The analysts wrote in a note, “We give CEO Jim Farley a lot of credit for resegmenting the company and showing the profitability challenges in transitioning Ford from ICE to electric. However, there is another benefit from the resegmenting, as investors got a better look at Ford’s Pro business.”
They believe Ford’s earnings will be driven by the higher margins allowed through their Ford Pro segment, which has a better market structure and a leading US share.
“Ford Pro has a very strong position in the US and European markets. According to Ford, nearly one in four fleets in the US are Ford-only,” they added.
UBS forecasts that Ford Pro’s adjusted EBIT will experience a 5% CAGR from 2023 to 2026, contrasting with a consensus estimate of -1%, ultimately reaching approximately $9.3 billion in 2026. Furthermore, the analysts envision the potential for margin growth in 2026 to reach the mid-15% range, which could contribute an additional $0.15 per share to UBS’s 2026 EPS forecast. This optimistic outlook is underpinned by the strong positioning of Ford Pro in the market and its growth potential.
Shares of GM and F are up 1.31% and 2.67% respectively in mid-day trading Wednesday.
