While Cathie Wood is warming to legacy automakers, Wells Fargo is taking a more pessimistic view.
“The market likely underestimates the permanency of recent raw material price increases and is not factoring in the impact of the recent aggressive US fuel economy regulations,” the bank’s senior equity analyst Colin Langan wrote in a note to clients. “As a result of both factors, [Ford (F) and General Motors (GM)] will be forced to sell BEVs to meet CAFE standards regardless of profitability.”
He added that similar regulations forced General Motors (GM) from the EU market in 2017. Now that the US is taking more European-like stances in terms of auto and emission regulation, such an uneconomic scenario could play out in the automakers’ largest market.
“We are concerned that 2022 could be the peak for profits,” Langan concluded. “It will be increasingly forced to absorb BEV losses to meet high 2026 US regulatory hurdles.”
Additionally, he noted price increases might not be able to stave off significant costs associated with compliance and raw materials, especially in a recession. That is not to mention longer term impacts like the looming UAW contract negotiations due in 2023, wherein the union is likely to seek significant wage increases.
Langan slashed his price target on Ford (F) from $24 to $12 while downgrading it to a sell-equivalent. Meanwhile, he cut his target on General Motors (GM) even more drastically from $74 to $33 while likewise downgrading to a sell-equivalent rating.
Read more on Cathie Wood’s recent purchase of GM shares.