2 Stocks to Avoid as US Auto Sales Forecast Plummets

The global semiconductor shortage is expected to continue negatively affecting the automotive industry’s production and sales this year. Given the industry’s bleak growth expectation, it could be prudent to avoid stocks such as General Motors (GM) and Ford Motor Company (F), which are expected to see large sales declines in the third quarter.

Auto manufacturing declined sharply, thanks to COVID-19 pandemic-induced restrictions and a decline in demand for new vehicles. And even as major economies are gradually returning to pre-pandemic levels of activity, the auto manufacturing industry continues to be impacted by a global semiconductor chip shortage. According to Cox Automotive, Edmunds, and J.D. Power/LMC Automotive forecasts, vehicle sales from July through September were down between 13% and 14% year-over-year.

As the semiconductor shortage is far from being resolved, several players are compelled to reduce output and close down factories temporarily. According to forecasts, the semiconductor chip shortage is expected to cost $210 billion in revenue to the global automobile market in 2021.

General Motors Company (GM) and Ford Motor Company (F) are expected to witness the largest third-quarter sales declines, so these stocks are best avoided now.

General Motors Company (GM)

GM designs, manufactures, and sells automobiles, trucks, crossovers, and components worldwide. The company operates through four segments: GM North America; GM International; Cruise; and GM Financial. It markets its vehicles primarily under the brand names Buick, Cadillac, Chevrolet, GMC, Holden, Baojun, and Wuling.

Last month, Bragar Eagel & Squire, P.C., a nationally known shareholder rights law firm, started investigating potential claims against GM on behalf of its investors. The inquiry is focused on determining whether the company has violated federal securities laws and/or participated in other illegal business activities.

According to U.S. auto sales forecasts from Edmunds, GM is expected to witness a sales decline of 31.5% in the third quarter, which is scheduled to be released on Friday.

For the second quarter that ended June 30, 2021, GM’s net cash used in investing activities came in at $7.01 billion. The company’s EPS is expected to decline 72.4% in the current quarter and 40.4% in the next quarter. The stock has declined 8.5% over the past three months and 6.6% over the past six months.

GM’s POWR Ratings are consistent with this bleak outlook. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

GM has a C grade for Stability, Sentiment, and Growth. Within the D-rated Auto & Vehicle Manufacturers industry, it is ranked #27 out of 63 stocks.

To see additional grades for Value, Quality, and Momentum for GM, click here.

Click here to check out our Automotive Industry Report for 2021

Ford Motor Company (F)

F is a global automaker engaged in designing, manufacturing, marketing, and servicing Ford trucks, automobiles, sport utility vehicles, electric vehicles, and Lincoln luxury vehicles. Automotive; Mobility; and Ford Credit are the three operational segments of the company. In addition, F has a strategic collaboration with ARB Corporation Limited to develop a suite of aftermarket products for the new Ford Bronco.

According to Edmunds' U.S. car sales projections, F is anticipated to witness a 29.3% drop in sales in the third quarter.

During the second quarter that ended June 30, 2021, F’s costs and expenses increased 21% year-over-year to $26.77 billion. Its operating loss came in at $22 million over this period. The company’s net profit declined 49.8% from the year-ago value to $561 million. Its EPS decreased 50% from the prior-year quarter to $0.14.

Analysts expect F’s EPS to decline 58.5% in the current quarter and 11.8% in the next quarter. The stock has declined 3.9% over the past three months.

F’s poor prospects are also apparent in its POWR Ratings. It has a D grade for Stability, and a C for Sentiment and Growth. F is ranked #31 in the same industry.

Click here to see the additional grades for F (Quality, Momentum, and Value).

GM shares were trading at $54.13 per share on Tuesday afternoon, up $0.15 (+0.28%). Year-to-date, GM has gained 30.00%, versus a 17.52% rise in the benchmark S&P 500 index during the same period.

About the Author: Pragya Pandey

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.


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