GM Value Plummets on Forecast

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By Greg Schneider
Washington Post Staff Writer
Thursday, March 17, 2005

General Motors Corp. warned yesterday that it will lose money in the first quarter and earnings will be way down for the coming year, sending its stock to a 10-year low on fears that the world's biggest automaker's bond rating soon will sink to junk status.

Automakers always go through cycles, but some experts fear that rising fuel prices and other factors are leaving GM in a serious jam. The company has rolled out a series of new cars that have been slow to catch on in sales, even when propped up by thousands of dollars in buyer incentives. Meanwhile, GM's line of pickups and SUVs -- the source of most of the company's profit -- is suffering so much that the company has cut factory output.

Chairman and chief executive G. Richard Wagoner Jr. said yesterday in a conference call that a new line of trucks to be introduced next year will rescue GM's aging product lineup. But with gas prices soaring and the public turning away from fuel-guzzling larger vehicles, his faith may be misplaced, experts say.

"I think it's serious," said Maryann Keller, an independent auto industry analyst and consultant. "The company never anticipated that gasoline would ever get this expensive, and therefore its major product commitments are large SUVs, which people no longer want to buy."

The North American market is the company's primary problem, Wagoner and Chief Financial Officer John M. Devine said in yesterday's conference call. Sales and production are down, and the ultra-competitive marketplace is exerting enormous pressure to keep prices down, the executives said.

As a result, GM said it now expects to lose $1.50 per share during the first three months of this year, down from previous projections that the company would at least break even. For the full year, the company expects earnings of $1 to $2 per share, down from an earlier target of $4 to $5.

Standard & Poor's Ratings Services lowered its outlook on GM yesterday to negative from stable, while its long-term bond rating of "BBB-" remained one step above "junk" status. Fitch Ratings lowered its GM rating to the same level.

"General Motors North America is, simply put, our 800-pound gorilla and today's announcement shows how important it is that we get this business right," Wagoner said in the conference call. "Unfortunately it's pretty simple: If we don't get the revenue, our bottom line suffers because we have a lot of fixed costs such as health care."

Health care represents more than $1,000 worth of cost, on average, in every GM vehicle -- a bigger expense than steel, Wagoner has said. The company needs a steady flow of cash to fund those expenses, which is why GM continues to offer aggressive discounts and other incentives to try to keep sales high. But sales continue to slip, draining the company's cash reserves.

In fact, GM said it expects negative cash flow of about $2 billion this year -- and that's in addition to a recent agreement to pay $2 billion to Fiat to get out of a possible purchase arrangement. Previously, GM had hoped to have $2 billion in positive cash flow this year.

The problem is made worse because GM's system of factories and dealerships is geared toward having about a 30 percent share of the U.S. market, but lately GM has slipped to about 25 percent market share against fierce competition from Japanese rivals. The company's contract with the United Auto Workers makes it difficult to close underused factories, so GM has struggled to keep costs down.

Yesterday's announcements sent GM's stock price down $4.71 to close at $29.01. That caused GM's total market valuation to drop to $16.39 billion -- lower, for the first time, than that of motorcycle maker Harley-Davidson Inc. (at $17.66 billion), according to Bloomberg News.

Other automakers also have seen 2005 get off to a sluggish start, but none is in quite the same predicament as GM. The Chrysler Group of DaimlerChrysler AG has gained market share for several months in a row, and yesterday Ford Motor Co. reaffirmed its earnings guidance for the first quarter, though it said results were likely to be on the low end of expectations.


© 2005 The Washington Post Company

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