STLA Stellantis NV

By Mike Colias and Nora Naughton 

The U.S. auto industry, hobbled this spring by the Covid-19 crisis, has bounced back stronger and faster than many expected with some companies reporting record profits in the third quarter.

Even for an industry accustomed to boom-and-bust cycles, the speed of the auto sector's recovery from the pandemic-related shutdowns last spring has surprised executives and analysts, who just six months ago were calculating how many months companies could survive.

The pace of new-vehicle sales over the past few months has rebounded to the strong levels seen before the crisis, despite slim pickings on dealer lots because of tight inventory.

Car buyers are paying record prices for new wheels, with dealers citing strong demand for luxury vehicles and high-end pickup trucks.

Fiat Chrysler Automobiles NV on Wednesday reported record operating profits of $2.7 billion for the third-quarter. The results handily beat analysts' expectations and marked a stark improvement from the second quarter, when the company posted a net loss of $1.2 billion.

Ford Motor Co. also delivered a strong quarter, reporting net income of about $2.4 billion and a global pretax profit margin of 9.7% -- its highest mark in five years.

GM reports third-quarter results Nov. 5. Analysts expect the company's bottom line to bounce back to pre-pandemic levels.

Still, a rising numbers of coronavirus infections in Europe and concerns about the possibility of factory closures weighed on Fiat Chrysler's shares Wednesday and those of other European auto companies, said Jefferies analyst Philippe Houchois.

"I think the concern is over a second wave," he said.

Fiat Chrysler's shares fell 2%, less than the broader market's steep drop. Volkswagen AG shares fell about 5% and shares of French auto maker Renault SA fell 8%.

Covid-19 cases also are rising in the Rust Belt states of Michigan and Ohio, where much of the industry's factory network is concentrated.

The auto sector's earnings rebound underscores the bifurcated impact that the pandemic has had across industries. While travel, energy, commercial real estate and other sectors have seen demand wilt, makers of consumer goods, from cars to washing machines, are scrambling to meet demand.

It is a stark reversal from this spring, when car executives took drastic measures to conserve cash, uncertain how long their factories would sit idle.

Ford and GM burned through billions of dollars in cash in the second-quarter as revenue dried up, and each added more than $20 billion in debt to cushion themselves against further losses.

The third-quarter, however, marked a big turnaround for Ford, which breezed past analysts' forecasts by posting a $3.6 billion pretax profit, excluding one-time items. That amounted to 65 cents per share, better than the average analyst forecast of 20 cents, according to FactSet.

Fiat Chrysler also said it doesn't expect any further disruptions from the Covid-19 pandemic this year and reinstated its full-year guidance after suspending it in the spring. It now expects to earn between $3.5 billion and $4.1 billion on an operating basis in 2020.

Research firm IHS Markit now forecasts North American production of 13 million vehicles, up from a forecast of 12.2 million it made in April. The firm raised its global projection to 73 million vehicles, from 69.3 million.

Industry executives, dealers and analysts cite several reasons for the faster-than-expected snapback. Interest rates are near record lows, which have allowed car companies to promote zero-interest financing, and government stimulus spending has helped some buyers afford new rides, dealers say.

Dealers also point to pandemic-driven shifts in how consumers are spending their money. Many people are hunkered down and spending less on things like dining out and vacations, are willing to splurge more on their vehicles and fixing up their homes, industry executives say.

"What's happening here is a reorientation and prioritization of the household budget," said Mike Jackson, chief executive for AutoNation Inc., the U.S.'s largest publicly traded dealership chain, on an earnings call last week. In the third quarter, the company said adjusted earnings-per-share from continuing operations hit a record of $2.38.

Lithia Motors Inc., an Oregon-based operator of about 200 dealerships selling everything from Mazdas to BMWs, saw the average price paid for a new vehicle in the third quarter jump by $2,500 on a same-store basis, to $40,100.

"Their checkbooks are probably fuller," Lithia Chief Executive Bryan DeBoer said last week. "They're not able to fly to travel. They're driving to travel."

Auto makers spent much of a nearly two-month shutdown period last spring laying out safety protocols, including mask wearing and rigorous testing, that so far has prevented factory outbreaks.

But intermittent supply shortages and higher-than-normal worker-absence rates have served as a persistent reminder of the threat of production disruptions from the virus.

For now, most auto plants are working at full throttle to meet high levels of demand that few pundits expected last spring. Auto makers built 4.1 million vehicles in North America during the third quarter, matching the output level from a year earlier.

At General Motors Co.'s plant in Flint, Mich., where its largest pickup trucks are made, employees have been working around the clock six days a week -- and occasionally on Sundays -- to restore depleted dealers stocks.

GM even has scheduled voluntary work shifts for extra pay on Tuesday, Election Day, which is a holiday under its contract with the United Auto Workers Union.

"The startup was slow with everyone getting accustomed to wearing masks and the new safety protocols, but everybody is kind of used to the new norm," said Chad Fabbro, an official at UAW Local 598, which represents about 5,000 workers in Flint. "We're cranking now."

This summer, Marybeth Morris gave up trying to find a Kia Telluride because the SUV was in such short supply. Instead, she settled on a Volkswagen Atlas, and even then, the first one she picked out was sold out from under her. A salesperson found a different model at another dealership and Ms. Morris placed her order.

"This was more complicated than any previous car buying experience," she said.

Write to Mike Colias at Mike.Colias@wsj.com

(END) Dow Jones Newswires

October 28, 2020 17:31 ET (21:31 GMT)

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