General Motors Lost Near A Billion

Thursday, March 17, 2005

 

92 Cutlass Supreme G.M. Sees a Loss Near $1 Billion; Stock Falls 14%By DANNY HAKIM

DETROIT, March 16 – General Motors’ stock fell to its lowest level in more than a decade Wednesday after the company said it expected to post a loss of nearly $1 billion for the last six months. The news set off G.M.’s largest single-day share loss since the market collapse of 1987 and further darkened Wall Street assessments of the company, the world’s largest automaker.

The losses reflected an increasingly harsh reality: that General Motors, which three years ago was thought to be the healthiest of the Big Three automakers in Detroit, is now considered the weakest, primarily because it is not selling enough cars at home. The losses also raised questions about the strategy of the company’s chairman and chief executive, Rick Wagoner.

On the New York Stock Exchange Wednesday, G.M. fell $4.71, or 14 percent, to $29.01, on volume of more than 59 million shares. It was the Big Board’s most active stock, and its closing price was the lowest since November 1994.

General Motors’ unsettling news led to a broad sell-off of shares in companies whose fortunes decline in a weaker economic climate. G.M. alone accounted for about 35 points of the 112.03-point decline in the Dow Jones industrial average.

Numerous problems are weighing on G.M. in the United States, its crucial home market, where brands like Pontiac, Buick and Saturn are household names yet are sorely lacking in appeal, according to J. D. Power & Associates, the quality and customer satisfaction analyst.

A wave of new models has not helped stem the company’s plummeting sales, even though G.M. spends more than any other automaker on rebates and low-rate financing deals. That has led G.M. to scale back its production in North America in the first half of the year by 300,000 cars, or about 10 percent.

Increasing health care costs are also a heavy burden for the company, which is America’s largest private health care provider; G.M. covers 1.1 million Americans, or nearly 0.4 percent of the entire population. Rising interest rates and weakening credit ratings are expected to cool its lending business, the General Motors Acceptance Corporation, which is its main profit center. And foreign competitors, like Toyota and Nissan, are far more profitable.

Mr. Wagoner, who has been chief for five years, did not outline significant changes to his strategy on Wednesday and insisted in a conference call with analysts and reporters that he still had the confidence of the company’s directors.

"The board is fully informed on all our strategies, and on that basis supportive," he said.

And John M. Devine, G.M.’s chief financial officer, declared in an interview, "The board – and I’ve observed it pretty clearly – it’s got full confidence in Rick and the team."

Company directors have not returned calls for comment in recent weeks about G.M.’s challenges.

In both stock and bond markets, the reaction to Wednesday’s news was swift and unforgiving. Merrill Lynch lowered its recommendation on G.M. shares to sell. Fitch, one of the three leading debt-rating agencies, downgraded G.M.’s debt to its lowest investment grade and put the company on a negative outlook for potential downgrading to junk bond status.

Standard & Poor’s, which already had G.M. debt at its lowest investment rating, changed its outlook to negative. The third major debt-rating company, Moody’s Investors Service, put G.M. on review, which means that the bonds could be knocked down to Moody’s lowest investment grade as soon as several weeks from now.

Thus, one of corporate America’s largest debt issuers could soon be selling junk bonds. That would not only drive up G.M.’s borrowing costs, but would also rattle the bond markets more broadly.

"The bad news of this morning certainly outstripped our downside expectation," a Standard & Poor’s credit analyst, Scott Sprinzen, said, adding that G.M.’s hold on an investment-grade rating was "tenuous."

"The concern for us is not just this year," he said, "but what that says longer term about how G.M. is going to fare."

G.M. has 7,600 dealers around the country and operations in 32 states, including plants that employ tens of thousands of workers. It is a top 10 employer in Michigan and Ohio and feeds a wide web of suppliers throughout the Midwest, from its large former parts subsidiary, Delphi, itself one of the nation’s largest corporations, to a variety of small businesses.

The company said on Wednesday that it expected an operating loss of $1.50 a share in the first quarter of 2005, or about $850 million, compared with its earlier projections that it would at least break even. For the year, G.M. cut its earnings forecast to a range of $1 to $2 a share, down from $4 to 5 a share.

Some analysts say that G.M. will be hard pressed to turn a profit this year. "We don’t see anything on the horizon to enable them to make money this year," said Sean Egan, a credit analyst at the independent ratings firm Egan-Jones, who has been among the most pessimistic about G.M.’s prospects.

Ronald Tadross, an analyst at Bank of America, said that despite the company’s heavy spending on purchase incentives, "we continue to believe G.M.’s products are overpriced" because resale values of cars are falling.

The automaker’s largest American rival, the Ford Motor Company, reiterated its projections for operating earnings in the first quarter Wednesday, though it said it expected its full-year earnings to come in at the low end of its previously stated range of $1.75 to $1.95 a share. Still, that gave some confidence to analysts.

"We believe that the problems at G.M. are really G.M.-specific," said John Casesa, an analyst at Merrill Lynch, "and while declining market share is affecting Ford, too, the company has a stronger portfolio of products." Mr. Casesa maintained a neutral rating on Ford shares.

The prevailing view of analysts about G.M. has been that the company is not close to having to file for bankruptcy protection because at least by the end of last year, it had $23 billion in cash in its automotive operations against roughly $30 billion in debt that does not come due for years. But the company said that cash flow from its operations this year would shrivel to a deficit of $2 billion from the positive $2 billion that had been projected.

Mr. Egan sees the risk of bankruptcy as more immediate than some others do. "The real question is, What’s going to turn this around?" he said. "They have relatively few levers to pull."

G.M. also restated its fourth-quarter earnings to reflect a recent agreement to pay Fiat $2 billion to extract itself from an industrial alliance. As part of the alliance, struck in 2000, Fiat was granted the right to sell its auto business to G.M. at any time over roughly five years. Several analysts have criticized that deal as a gift to Fiat that put G.M. at risk of having to absorb Fiat’s badly struggling auto business.

G.M.’s own European operations have lost money for five consecutive years. Mr. Wagoner had said that the company would make money on the Fiat deal because of parts-sharing agreements.

For the fourth quarter of last year, G.M. said it would take an $886 million charge, which turns a relatively slim profit of $1.11 a share into a loss of 17 cents a share. That is equivalent to about $96 million of the nearly $1 billion loss projected Wednesday.

Mr. Wagoner said the company would largely stick to its previously outlined strategies – consolidating its global operations into one engineering and manufacturing organization, and continuing an effort to invigorate its car and truck lineup.

"North America is our 800-pound gorilla and today’s announcement really shows how important it is that we get this business right," he said, adding that products remain "the first and most important element of this strategy to get North America on track."

He and other G.M. executives are convinced that the company’s fortunes will substantially improve when a new wave of its most important vehicles – medium and large-size sport utility vehicles and large pickup trucks – arrive in 2006 and 2007. But demand for larger S.U.V.’s has been weakening, and analysts are concerned that if gasoline prices remain high, new versions of G.M. mainstays like the Chevrolet Suburban and the Cadillac Escalade will not be the profit sources they have been in the past.

"The real part of the earnings problem," Mr. Sprinzen of Standard & Poor’s said, "is what is going on in S.U.V.’s, particularly mid- and large-size S.U.V.’s"

Chris Ceraso, an analyst at Credit Suisse, asked Mr. Wagoner and Mr. Devine on a conference call what steps the company was considering to reckon with the fact that its share of the United States market had dropped to 25 percent in February from close to 33 percent a decade ago.

"What are the thoughts, longer term, about shrinking the business to get more in line with where the market share is?" he asked.

Mr. Devine, the chief financial officer, replied, "Getting the share back up is our top priority."

"Obviously," he added, "the losses we’re looking at in North America right now provide clearly some additional incentive to move faster here."

Jeremy W. Peters, in Detroit, and

Jonathan Fuerbringer, in New York, contributed reportingfor this article.

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