General Motors Co. (NYSE: GM) and Ford Motor Co. (NYSE: F) could have two very different reactions for earnings season. That is the opinion of Merrill Lynch’s John Murphy and the research team at the firm. It is interesting when you see certain analyst commentary, followed by huge upside but with very mixed outlooks.

The Merrill Lynch team has a Buy rating with a $42 price objective on General Motors. That implies upside of over 36% from Monday’s closing price of $30.77, and then there is the high dividend yield to consider.

For GM, it’s really not all just about sales growth. Murphy and his team think that GM’s second-quarter earnings may prove the skeptics wrong. They expect that GM should benefit from solid production growth and the positive sales mix and pricing. GM’s go-to-market strategy in North America is also considered a positive. The report said:

We expect GM’s FY16 earnings may be back-end loaded given CUV launches and a potential production ramp to replenish inventory… we also expect GM’s results will benefit from strong North American margins as a result of positive mix/price and the company’s go-to-market strategy in the region, as well as
some stabilization in China volumes/pricing. We forecast continued losses in Europe and Latin America, which could prove conservative, but appear reasonable for now.

Ford only has a Neutral rating at Merrill Lynch. Still, the price objective of $15 is higher than Monday’s closing price of $13.65. There is also Ford’s dividend to consider, and this may seem like a Buy rating compared to some of the other analysts with Neutral ratings.

Merrill Lynch said that Ford’s earnings should be Super Duty–sized, but the reason for the Neutral rating is that the team expects earnings may decelerate thereafter. Similar to GM, Merrill Lynch sees Ford having strong seasonality and a favorable North American production mix. Their main concern is Ford’s outlook for 2016 and beyond, with the report saying:

Similar to recent quarters, we expect much of the investor focus during earnings will be on Ford’s outlook for 2016 and beyond, particularly for North America (i.e., SuperDuty launch, inventory levels, etc.) and Europe (i.e., Brexit impact on EU operations/results). In aggregate, Ford’s 2016 financial outlook remains consistent with the forecasts provided in January, including “equal to or higher” revenue, total company pre-tax profit, and operating earnings per share, which appear reasonable at this point.

GM shares were last seen trading up 0.4% at $30.98 on Tuesday, in a 52-week trading range of $24.62 to $36.88 and versus a consensus analyst price target of $36.69. Ford’s stock price was up almost 0.3% at $13.69, in a 52-week range of $10.44 to $15.84 and with a consensus price target of $14.81.

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GM reports on July 21 and Ford on July 28. As far as the overall tone, Merrill Lynch notes that sentiment toward auto stocks remains negative. They feel this reflects the pervasive investor skepticism that the U.S. auto cycle may be exhausted. Maybe that is why both stocks are valued ridiculously cheap at well under 10 times earnings expectations. Stay tuned.

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