Shares of General Motors
According to UBS analyst Patrick Hummel, challenges are anticipated for the automotive industry in the near future. Hummel cited increasing recession risk and the potential for demand to crater in the coming months.
In addition, the post-pandemic environment is already proving to be a challenge for the auto industry. Hummel pointed to rising dealer inventories across the U.S., declining used car prices, and a drop in orders for new cars.
"We think it will only take 3-6 months for the auto industry to end up in oversupply, which will put an abrupt end to a 3-year phase of unprecedented OEM pricing power and margins," Hummel wrote in a note.
Ford's rating was dropped to sell from neutral, with a price target drop to $10 from $13. The automaker has previously warned investors of that it faced an unexpected $1 billion in additional supply costs. In addition, Ford has noted that it has an increasing supply glut of unfinished vehicles, with 40,000-45,000 vehicles currently in its inventory that are missing components.
GM was downgraded from buy to neutral, with its own price target slashed to $38 from $56. Hummel noted that GM's less dismal rating was a result of the company having experienced "no hiccups" in its production schedule, unlike Ford. However, the company still faces significant risk from an industry-wide downturn.
So How Bad was the Hit?
Monday was rough for Ford and GM as investors reacted to the downgrade, with both companies suffering from a significant pre-market drop.
Ford shares dropped almost 6% pre-market and slid a further 1.3% within the first half hour of markets being open. Ford shares were down 6.9% from Friday's closing price after markets closed on Monday. Tuesday showed some modest recovery for the automaker, with Ford managing a 1.7% gain.
GM slid 3.8% in pre-market trading on Monday and dropped an additional 2.2% within the first half-hour after markets opened. GM managed to recover somewhat throughout the rest of the day, though shares were still down 4% by market close. GM managed to recover somewhat on Tuesday, but investors still seemed to be uneasy with the company's shares, which slid an additional .6%.