Ford Motor Company (NYSE:F) might offer a better risk-reward opportunity in the short term than General Motors Company (NYSE:GM) because the latter’s positive results and guidance raise are already baked in, according to analysts at UBS.
In its recent report, UBS provided a nuanced analysis of the US auto sector ahead of the second-quarter earnings season, highlighting contrasting expectations for legacy automakers and auto suppliers.
"GM has already telegraphed better results and a likely guidance raise, but it's not overly clear what could surprise to the upside," analysts wrote.
In contrast, Ford is expected to beat expectations and potentially announce a special dividend or a modest buyback.
While traditional automakers General Motors (GM) and Ford (F) are anticipated to post solid results, the outlook for suppliers is less optimistic.
UBS notes that supplier stocks have underperformed significantly, with an average decline of approximately 9% over the past month and 14% over the last three months, compared to the S&P 500's 4% and 7% drops over the same periods.
This underperformance is attributed to "limited volume growth, poor customer exposure, and belief that further production cuts are needed,” analysts wrote.
Despite these challenges, analysts suggest that the upcoming results might not be as dire as the market sentiment suggests.
"For 2Q24 results themselves, we see modest negative surprises to in-line results with sales coming in a bit softer but margin performance a tad better," they stated. However, they caution that management teams are likely to guide towards the lower end of their existing 2024 outlooks or even revise them negatively.
UBS highlighted suppliers like BorgWarner (BWA), Visteon (VC), and Aptiv (APTV), which are expected to reiterate their guidance, as opposed to those like Adient (ADNT), Lear (LEA), and Magna (MGA), which might face negative revisions. The report suggests that companies resetting expectations might be seen as "de-risked" post-earnings, while those reiterating guidance could be vulnerable if production forecasts are revised down.
Overall, while UBS remains cautiously optimistic about the legacy OEMs, the outlook for suppliers is clouded by persistent uncertainties and potential negative revisions.