Ahead of next week's earnings report, Bank of America is "cautiously bullish" on Ford and General Motors: Strong fundamentals are hard to offset short-term risks

According to Zhitong Finance APP, Ford (F.US) and General Motors (GM.US) will both announce their third-quarter financial reports next week. On this occasion, Bank of America Securities has given both companies a "Buy" rating but has simultaneously lowered their target prices: reducing General Motors from $62 to $61 and Ford from $14 to $13.5. Bank of America stated that the retail sales and pricing performance of both companies in the third quarter indeed exceeded market expectations, but starting in the fourth quarter, tariffs, supply chain disruptions, and a slowdown in electric vehicle demand will significantly suppress profitability, and the overall profit model for 2026 will also need to be revised downwards.

Specifically, Bank of America pointed out that Ford and General Motors saw their U.S. retail sales grow by 8.2% and 7.7% year-on-year in the third quarter, respectively, both outperforming the industry-wide growth rate of 5.2%. At the same time, both companies achieved an increase in average transaction prices (ATP), with Ford's prices rising by 1.7% year-on-year and General Motors increasing by 4.8%. Additionally, General Motors' incentive spending as a percentage of vehicle price was only 6.1%, lower than the industry average, indicating stronger pricing control. Bank of America predicts that General Motors' adjusted earnings before interest and taxes (EBIT) for the third quarter will be $2.81 billion, which is 3.5% higher than the market consensus; Ford's EBIT for the third quarter is expected to be $2.11 billion, also exceeding expectations by 3.9%.

However, entering the fourth quarter, Bank of America holds a notably cautious attitude towards both companies. The main risks facing General Motors are metal tariffs and tariffs on medium/heavy-duty trucks. If a 25% tariff is implemented, Bank of America estimates that EBIT will decrease by $650 million in 2025. Ford, on the other hand, is expected to reduce production of the F-150/250 models by 120,000 to 150,000 units in the fourth quarter due to a fire at a key aluminum supplier's factory at the end of September. Bank of America has accounted for approximately $700 million in gross profit loss and has significantly lowered its fourth-quarter EBIT forecast from $1.79 billion to $1.33 billion, with EPS dropping from $0.30 to $0.21, far below market expectations.

In addition, Bank of America has also revised down the earnings expectations for both companies for 2026. For General Motors, due to a 3% decline in North American sales expectations, Bank of America has lowered its 2026 EBIT from $13.4 billion to $11.8 billion; for Ford, due to a slowdown in the gross margin improvement of the Ford Pro business and continued losses in the Model e electric vehicle business extending to 2027, the 2026 EBIT has been revised down from $9.7 billion to $8 billion. The target prices are based on an expected EV/EBITDA valuation of about 3 times for 2026, which is at the lower end of the historical valuation range for both automakers.

In terms of cash flow, Bank of America expects General Motors' free cash flow in 2025 to be $7.9 billion, sufficient to support ongoing buybacks and dividends; however, due to the impact of the fire and tariffs, Ford's free cash flow in 2026 is expected to drop from $4 billion to $2.5 billion, potentially limiting its future buyback capacity.

Overall, Bank of America believes that the current valuation has reflected most negative expectations, with the expected EV/EBITDA for General Motors and Ford in 2026 being only 2.8 times and 2.6 times, respectively, providing a certain margin of safety. However, in the short term, the implementation of tariff policies, the recovery of the supply chain, and the trends in the electric vehicle market will remain key variables determining stock price fluctuations