Analysts React to GM Warning
March 16, 2005 3:30 p.m.
General Motors Corp. was hammered in the market today after saying it expects to lose $1.50 a share in the first quarter. Analysts weren't too kind either, noting the auto maker's falling market share, reduced plans for car production, and fears that the company's debt could be downgraded to junk status. Here's a roundup of what Wall Street is saying. (Analyst disclosures follow.)
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GM's outlook for 2005 is materially weaker. The downgrade is a result of the company's announcement that market conditions are pressuring results more than originally anticipated. As a result, the company now expects 2005 EPS to be in the range of $1.00 to $2.00, which is down from its previous guidance of $4.00 to $5.00.
-- Merrill Lynch analyst John Casesa, who downgraded the company to "sell" from "neutral."
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We continue to believe GM's products are overpriced (relative to the Japanese brands) by 10% to 15% due to weak resale values, and that the Japanese brand year-over-year net pricing has been flattish. So, the problem is structural and GM needs to lower net price (on a year-over-year basis) relative to the Japanese brands (a costly task) in order to stop the share loss.
-- Ronald Tadross of Bank of America, who has a "sell" rating on the stock, and lowered his price target on the company to $23 from $27
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Some of the first-quarter weakness probably relates to one-time pricing actions on midsize SUVs. We estimate the price cut on mid-SUVs would hurt EPS by about 35 cents to 40 cents in the first quarter. The magnitude of the miss vs. our forecast could suggest additional pricing action. Earnings and cash flow are much weaker than expected. This could suggest that GM's $2 dividend may be at risk.
-- Morgan Stanley analyst Stephen Girsky, who has an "equal-weight" rating on the stock
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Key drivers of the shortfall are weakness in North American sales volume and a higher concentration of lower-margin passenger cars in its sales mix…we expect downward pressure on the shares this morning and would not view this as a buying opportunity.
-- Jon Rogers of Citigroup Global Markets, who has a "hold" rating on the stock with a $36 target price
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We continue to believe GM is in a precarious position given lower GM North America production volumes, especially related to its highest profit platform, GMT800 [truck frame]; the challenging pricing environment; and less profitable mix (more cars/less trucks). We do not expect modest improvements from automotive operations outside North America to offset these domestic headwinds. … We remain confident that possible credit rating downgrades and a dividend cut are in the company's near-term future and will only add insult to injury.
-- Joseph Amaturo, analyst for Caylon Securities, who reiterated his "sell" rating on GM and lowered his price target to $24 from $30
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This news … is a reflection of the challenges GM is facing in terms of pricing and mix for the vehicles it sells. Further, we believe that additional production cuts [in the second quarter] may be necessary to bring inventory in line in the short term, which could be an additional drag to earnings and operating cash flow for the year. Perhaps most significantly, we believe that this poor operating performance in North America could result in a dividend reduction, which we believe would be viewed negatively by the market. While the company stressed that it is on pace to meet expectations for its other global operations, as North America is its most important market, we believe the near-term risks clearly outweigh any other factors.
-- KeyBank Capital Markets analyst Brett Hoselton, who downgraded GM to "hold" from "buy"
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For investors who need to be exposed to this automotive manufacturer, we recommend GMAC bonds over GM given that GMAC's receivables assets are of higher quality than GM's production facilities (which continue to suffer from shutdowns and write-offs). Also GMAC has additional funding sources outside of the unsecured debt markets. … We continue to be negative, longer-term on General Motors given continued pressure from foreign and "transplant" competition, a rising interest rate environment, and high labor and healthcare costs.
-- Brian Fox, analyst at McDonald Investments, of which KeyBanc Capital Markets is a division
--Compiled by Worth Civils and David Gaffen
Right on....methinks GM will survive : )