GM slashes earnings forecast (forsees $828 million 1st Qtr loss)

Automotive News ^ | 3/16/05 | Dale Jewett and Jason Stein

[BurbankKarl]

Declining sales and production cutbacks in North America are putting a huge crimp in General Motors’ earnings. That prompted the automaker on Wednesday to slash its expectations for this year.

GM expects to lose about $848 million, or $1.50 per share, in the first quarter excluding special items. In early January, the automaker had said it expected to break even for the quarter.

For the full year, GM now thinks it will post earnings in a range of $565 million to $1.13 billion -- or $1 to $2 per share -- excluding special items. That is a dramatic reduction from its earlier earnings forecast of $2.26 billion to $2.83 billion, or $4 to $5 per share.

In addition, GM foresees a $4 billion swing in its operating cash flow for the year -- from $2 billion to a negative $2 billion.

The automaker blamed lower sales in North America and a shift in the sales mix away from high-profit trucks to lower-profit cars for the earnings falloff.

GM's previous first-quarter earnings expectations were based on North American volume of 1.25 million vehicles. Since then, production schedules have been reduced by approximately 70,000 vehicles.

GM also expects negative operating cash flow in 2005 of approximately $2 billion, before the Fiat settlement and GM Europe restructuring, versus the previous target of positive $2 billion.

"Clearly we have significant challenges in North America. The rest of our automotive businesses, and GMAC, are running in line with, or ahead of, our expectations," said GM Chairman and CEO Rick Wagoner. "But North America is our biggest business, and the key driver of automotive earnings and cash flow. So it's important that we get this business right."

More cutbacks appear to be on the way.

"The competitive environment that we face in North America means we must continue to find ways to reduce our costs and grow revenue," warned GM Vice Chairman and Chief Financial Officer John Devine. "While we have made good progress in reducing costs over the last several years, the projected loss in North America reinforces our need to do much more."

"One of the issues we've had for North America is the increasing drag of health-care costs on North American profitability," Devine added on the conference call with Wagoner.

"I don't have any silver bullets on heath care … but clearly I think the weakening profitability this year has focused on our need to make progress on health care."

GM, the largest private provider of health care in the United States, had warned earlier that its medical expenses would increase by about $1 billion this year.

GM said its other automotive regions and GMAC are all on track to meet or beat their 2005 net income targets.

Euro bonds of GM plummeted after the company announced its profit warning.

Standard & Poor's on Wednesday revised its rating outlook on GM and its finance arm to negative from stable, setting the stage for a downgrade of the world's biggest carmaker to junk status.

A downgrade to junk status would likely significantly raise GM's borrowing costs. GM and its finance arm had about $300 billion in debt at the end of last year.

S&P said it views the rating as "tenuous" and could cut it at any time if it looked like GM was not on a trajectory to improve its financial performance in 2006 and beyond.

Moody's Investors Service and Fitch Ratings, which have GM's debt rated 2 and 3 notches above junk respectively, are likely to reconsider their ratings as well, analysts said.

[wideawake]

What planet do you live on?

As is your wont, you resort to insult instead of argument.

Again, the burden is upon you, especially at a conservative website, to explain why Marxism and class warfare rhetoric are valid tools for describing economic reality.

You were wrong on the facts to begin with: GM is not losing market share because Americans are too poor to buy cars - simple statistics show that Americans spend more on automobiles every year, and that a higher percentage of Americans own luxury level cars every year, and that numerous manufacturers are gaining sales volume in the US.

Now you assert that simple economic reality is some kind of coordinated conspiracy: i.e. regions like the American South and South America that have a labor surplus are more efficent places to manufacture cars than in Michigan and other non-right-to-work areas where the labor market is artificially restricted and overpriced.

The only conspiracy is the one proudly proclaimed by UAW: they demand that GM and other manufacturers pay extortion-level prices for labor, and they demand it as their "right".

You also assert that there is such a thing as a "working class" which is an outdated, simplistic Marxist concept. 21st century America is not 19th century Europe. We do not have a blood aristocracy that lives off agricultural rents. We do not have classes that one is born into for life. Marxism presumes that manual labor is the destiny of 90% of all men by nature. Nowadays we realize that this is not fate, but a voluntary career choice.

According to Marx, the fat lazy UAW worker who gets paid $80,000 a year to take coffee breaks and collect union dues is a member of the mythical "working class" while the freelance IT consultant who earns $60,000 a year tweaking code is a "propertied bourgeois".

These tired old labels just do not apply to life anymore. There is no such thing as a 40 year career in a factory putting in a bare 40 hour week with endless contractual raises and guaranteed job security anymore. And thank God for that.

[FBD]

You make some good points, but I think a large part of the reason is increased cost of gas. People aren't going to buy SUV's and pickups that only get 12 miles to the gallon, when it appears that gas prices are going to keep going up.

But I agree with you that outsourcing is affecting consumer spending. I just had a customer who canceled a sale with me, because his IT job with IBM was just outsourced to India. No job for him...no job for me...a reverse trickle down effect, so to speak.

Southack may not agree on that point, I don't know.
But when people who made $70,000 a year working on computer software suddenly find themselves losing their job to some guy in India, who will work for $7000 a year, that has a negative effect on consumer confidence and spending power.

It doesn't take an egghead economist to figure that one out.

[Southack]

"But when people who made $70,000 a year working on computer software suddenly find themselves losing their job to some guy in India, who will work for $7000 a year, that has a negative effect on consumer confidence and spending power."

If Software was America's only business, then you'd have a point. However, the U.S. has *millions* of different types of businesses. At any given moment, some of those businesses are becoming extinct, or changing, or shrinking, or growing. New businesses are being added every day, too.

So what matters overall is *not* what happens inside any one business, but to the whole economy.

...And for that, we know that unemployment is down, overall employment is up, and wages are up even after being adjusted for inflation.

[FBD]

I don't know, figures lie, and lier's figure, so the truth is usually somewhere in the middle. I like factcheck.orgs articles, and according to them, the middle class is slightly shrinking, and wages are slightly down, but not as much as Democrats would like folks to believe. Unfortunately they are down. (-1.2% between 25K-75K & -.04 % above75K)

Kerry's Dubious Economics-"He says new jobs are paying $9,000 less than the old ones. That's not a fact."

Update on Kerry's "Shrinking Middle Class" -- Still Shrinking in 2003 "We said his claim was based on stale numbers. Now some fresh statistics support what he said."

.

But there is definitly something wrong with coporate stockholder mentality, when companies reward failure CEO's like CEO Carly Fiorina of HP, with a 21 million severance package, while the company is losing money and outsourcing jobs like crazy to India.

And software and computer companies aren't alone in this stupidity. Sorry to sound negative, but the attitudes of many politicians and corporate heads toward the middle class, and blue collar workers just isn't right. They treat them like crap. Why, I haven't a clue. But they do. http://money.cnn.com/2005/02/09/technology/hp_fiorina/

[Springman]

Bump for later.

[Southack]

Oh, it's true that the middle class is shrinking, but that's because more and more Americans are now rich!

And that's a good thing.

[FBD]

>"Oh, it's true that the middle class is shrinking, but that's because more and more Americans are now rich!"<

-What would you personally classify as "rich"?
That's a pretty wide variable depending on who you are, and where you live. Here's a fun site, you might get a kick out of it.

http://www.globalrichlist.com/

I'll bet you are "rich" in comparison with most of the rest of the world. ;^)

Myself, I don't view someone as even starting to be "rich", unless they have assets of at least 5 million. Anything less then that (IMO) doesn't even buy an "r" in the word! :)


regards

[Southack]

Being rich or wealthy is having the ability to change your area by simply stroking a check.

Lots of people who have money can't do that, however. Some can't do it because they have no control over their cash burn rate. Others can't do it because they lack discipline or education or sanity. Five Million Dollars does the flake in the sanitarium no good as he crawls on his knees and barks at the guards, after all.

On the other hand, the programmer who moves to rural India after saving a mere $50,000.00, can employ hundreds of workers to build gravel roads and wood bridges and little grass huts and take out one ad in a travel magazine for a back-country tourist trap.

Ditto for the California couple who sells their tiny Long Beach 2 bedroom hovel for 2 million Dollars and moves in to rural Arkansas or down to Panama. Suddenly that working couple can live like retired kings, employing gardeners, maids, nannies, and building up a local church that names its new daycare building for them.

But the lotto winner, baseball star, and rapper who have no control over their daily spending aren't rich, simply consumptive. Many a jazz star and lottery winner has had to file for bankruptcy, after all, without even so much as a building or a song being named after them.

So being truly wealthy requires more than just cash, at least in my book...and even the amount of cash required will vary relative to the amount of money nearby.

[Southack]

"The auto industry is a major leader of the national economy. When autos sag, the economy slows."

That was partially true decades ago, but not valid in modern times at all.

General Motors, the largest producers of cars in the world, has a mere $16 Billion market cap. That's less than Nike...heck, that's less than Harley Davidson ($17 Billion).

The U.S. has a $12 Trillion annual economy. If $16 Billion in market cap disappeared completely, the U.S. at large would never even notice. Losing 1/1,000th of our annual GDP wouldn't even impact a single year of our growth, and future years would certainly never feel it.

[FBD]

>"Five Million Dollars does the flake in the sanitarium no good as he crawls on his knees and barks at the guards, after all."<

Ha! yeah. {G} - good points and perspectives.

[RightWhale]

The auto industry is more than GM. Got to add the 'foreign' marks such as Toyota and count them. There is also the maintenance and operations part of the industry, e.g., the local service station. Not counting the grossly inflated housing market of the moment, the auto industry is a huge percentage of the national wealth. Cars are like second houses, in time spent inside and in monthly payments and gas/oil. We are wealthy, but a third our wealth is sitting in the driveway quietly oozing various fluids onto the pavement.

[Southack]

"Not counting the grossly inflated housing market of the moment, the auto industry is a huge percentage of the national wealth. Cars are like second houses, in time spent inside and in monthly payments and gas/oil. We are wealthy, but a third our wealth is sitting in the driveway quietly oozing various fluids onto the pavement."

The *average* American, counting men, women, and children of all ages and races...has $161,700 in net wealth above debt.

That's counting home equity, IRA's, 401k's, brokerage accounts, bank savings, cars, homes, everything.

Of that wealth above debt, less than $10,000 is in a car, on average, per American.

And even if/when GM goes belly up, your cars will still have some value, and still be guzzling gas and getting new tires and maintenance (i.e. churning money back into our economy).

But overall, the U.S. economy would no longer even feel the complete elimination of GM, the world's largest producer of automobiles.

Our $12 Trillion annual GDP is simply too vast to be bothered with a $16 Billion company.

[RightWhale]

GM is no longer primarily a car manufacturing business, but should be in the financial sector. Ignoring the inflated real estate, a large chunk of our net worth is the car. Espcially those who rent.

[Southack]

GM's credit agency, GMAC, will survive and thrive long after GM itself has forgotten that it once made cars.

[RightWhale]

I still use the GMAC key chain even though the Chevy was paid off 15 years ago. I might have gotten a better deal financing the Toyota through GMAC, who knows unless they ask. Our debt industry is huge, maybe comparable to the healthcare industry.

[donozark]

From March 11,2005 KIPLINGER LETTER:

"U.S. automakers are bracing for another bumpy ride this year. The Big Three's market share will slip again...to about 56% of the U.S. market,down two points from 2004. Much-ballyhooed new models aren't wowing consumers. For example, sales of the Ford Five Hundred, the successor to the popular Taurus, are lurching along. The same is true for GM's Pontaic G6 and Buick LaCrosse. They're selling at one-third the rate of the Grand-Ams, Regals and Centuries that they are replacing. And higher-margin domestic SUVs are losing out to foreign competitors.

Detroit has no choice but to dangle more juicy incentives to lure customers, a practice that automakers had been hoping to curb.

That'll dampen profits this year and extend first-half cutbacks in auto production throughout the year. GM will pare back the most.

Foreign brands in the U.S. are enjoying much smoother cruising. Nissan, Toyota, Honda and others will see sales keep growing this year.

Asian manufacturers are building more plants in the U.S...in Tenn., Ohio,Ala., Miss. and S.C....and expanding existing ones. Look for Hyundai to roll out its first American-built cars by fall."

[donozark]

Somewhere I read GM backing out of Fiat deal. Gonna pony up $2 Billion and drop it, IIRCC.

[Eric in the Ozarks]

Yeah. GM paid Fiat $2 billion not to get in bed with them, after paying millions to get in bed with them.