Ford and GM’s earnings diverge

July 25, 2014, 6:40 PM UTC
contract armin harris
Kyle Bean for Fortune

The financial snapshots of the two big U.S. automakers, General Motors and Ford Motor, stood starkly in contrast as both issued second-quarter statements on Thursday – Ford’s a picture of health and GM’s a tableau of troubles.

Ford (F) posted net income of $1.3 billion for the period, up slightly from last year, while GM earned $190 million from April through June, down about a $1 billion from the same period a year ago.

Both Detroit-based automakers are being led by newly-minted CEOs, Ford by Mark Fields, GM by Mary Barra. Ford looks to be on a roll, with record earnings in North America, rising sales in China and the first quarterly profit from Europe in three years.

GM (GM), by contrast, has been relegated to a legal and regulatory penalty box, as it recalls millions of vehicles in the U.S. over safety concerns, many of which could have and should have been addressed years ago. Barra has testified before Congressional panels, absorbing withering criticism by legislators unhappy with GM’s commitment to customer safety. GM is warning shareholders it expects to spend $400 million and possibly up to $600 million to compensate victims of ignition-switch defects in several models dating back to the early part of the past decade.

Barra, appearing at a news conference on Friday, said she was heartened by “strong core operating performance” in the previous day’s financial statement and that “winning GM products will be the strength and future of the company.”

She’s got a point: GM vehicle models are winning favorable reviews and transaction prices are strong, as the U.S. automotive market gains momentum, supported by consumers that have delayed purchases in the wake of the global financial crisis. The safety and recall probems so far don’t seem to be damaging GM sales and should pass—sooner rather than later if GM and Barra’s prayers are answered.

But the strong and rising U.S. auto market, in terms of unit sale and pricing, inevitably will be followed by cyclical weakness, as always is the case. GM, still recovering from a painful bankruptcy in 2009, must take advantage of the current prime conditions for profit. Retained profit, after all, provides the resources for investments in new plants, equipment and vehicle models. GM’s second-quarter $1 billion shortfall could have covered the redesign of a key vehicle model.

Investor confidence in GM matters; and at the moment it’s not especially high relative to others. In the past year GM stock has returned 8.6%, while the Dow Jones Industrial Average is up 14.5% and S&P 500 index is up 24.2%. Ford shares meanwhile returned 17.7% to investors.

Ford, with a market capitalization of $70.5 billion compared to $56 billion for GM, will face difficulties of its own in the current quarter, as it shuts down pickup truck factories to switch to its new aluminum body F Series pickups.

Ford and GM remain far too dependent on the profit earned by large pickups and variants such as the big SUVs. It’s crushingly important, therefore, that both improve the market performance of their passenger cars, which face brutal competition from the likes of Camry, Altima, Civic and Sonata.

Relative positions of strength and weakness can reverse instantly in Detroit. It’s reasonable to suppose that Fields, watching GM and Barra’s exertions, gains no comfort from them.