All hell broke last Tuesday for Dave Healy -- and no wonder.
Trading in the stock of auto kingpin General Motors was delayed because of a tremendous influx of sell orders, and Healy was flooded with phone calls from frantic clients (and brokers) of brokerage biggie Drexel Burnham Lambert.
"Do you sell, buy or what?" he was asked again and again.
There was no equivocation. The 43-year-old Healy, a widely respected Drexel Burnham analyst who's been following the fortunes of the auto industry for the past 18 years, shot back with an immediate and emphatic one-word reply:
In fact, in an ensuing interview, Healy told me: "This has to be one of the best buying opportunities in General Motors (and Ford) in years. . . ."
Suprising words, indeed, considering the woes of the auto industry.
Take GM, for example. The reason for the selling influx: a hefty 48 percent cut in the quarterly dividend (from $1.15 to 60 cents). In addition, the company said it may run in the red in the second quarter; the last time that happened was nearly 10 years ago in the fourth quarter of 1970.
In reaction to these dismal tidings, unhappy investors dumped GM shares like crazy -- sending it skidding over three points to 41 1/2 on a turnover of more than 950,000 shares. At press time, the stock was around 42 1/2.
Think that's bad? Look at Ford; it's credit rating has been downgraded and the company, according to Healy, could experience a staggering $400 million loss this year. Moreover, at a recent price of around 21, Ford shares were selling at their lowest level since 1959.
The industry's problems are hardly a secret: soring imports (about 25 percent of sales); a big jump in gasoline prices, with more to come; an improper product mix -- notably not enough smaller cars; tremendous retooling and research and development outlays (estimated at $80 billion) to meet the new market demands, and mushrooming costs for labor and materials.
Clearly, the industry is in a financial bind that extends far beyond Chrysler. And in the minds of some auto industry watchers, these fundamental difficulties could last for years.
Healy doesn't believe it. He argues that most of the problems reflect an earnings collapse due to a recession and booming interest rates. And as business improves and credit eases, the current difficulties, he contends, should give way to sharply higher earnings performances both for Ford and GM. Healy sees this profit surge under way next year.
For starters, he expects imports to level off modestly in both 1981 and '82 in the face of massive introductions of small gas-efficient cars by the U.S. makers (Ford, starting in September of this year; GM, in May of '81).
In addition, he sees the U.S. car-making industry benefiting at the expense of foreign competition from the recent decline in short-term interest rates. The rate decline, as he explains it, will cause a lot of foreign money to unload greenbacks, creating weakness in the dollar compared with the yen. And that, in turn, will further boost the price of Japanese autos, which account for over 90 percent of all imports.
Healy also points out that one of the best "buy" signals for auto stocks has been those rare periods when new auto loans fall below the actual repayments of such loans. And he thinks that may have occurred last month (the Federal Reserve reports the figures in early June).
No one likes a dividend cut. But the last time GM did it, you would have made a bundle if you had bought the stock. That cut -- from $3.40 to an annual $2.40 rate -- was in February of 1975. The stock at the time was in the low 30s; a year later, GM hit a high of 78.
Sounds good, but Healy stresses that buyers of Ford and GM should expect little or no good news in the months ahead; in the second quarter, for example, he expects GM to report a loss of about $60 million. An even bigger second-period loss -- $250 million-$300 million -- is projected for Ford.
Healy, a non-touty analyst who continues to regard Chrysler as a strong bankruptcy candidate, concedes that the kind of losses he's projecting for GM and Ford could drive both stocks lower. But he doesn't believe it could be much lower. For example, he thinks maybe $38 or $39 is the bottom price on GM. And he rates $19 as a low point on Ford; it was around $23 as we went to press.
Within a year or two, Ford shares have a good shot at doubling, while GM could go up about 50 percent, Healy believes.
Healy's earnings projections are pretty exuberant.
In the case of GM, he expects per-share earnings of $1.60 a share this year and $11.25 in 1982; '79 net was $10.04 a share.
For Ford, his estimates call for this year's loss to swing to a $14-a-share profit in '82; Ford earned $8.20 in '79.
Healy hastens to point out that his Ford projections require that critical overseas earnings taper off only modestly; further, that the company's new front-drive subcompacts succeed at least reasonably well.
There's been some speculation that Ford could go the way of Chrysler, but Healy says he doesn't see any significant threat to Ford's survival.
Healy, by the way, is not alone in his enthusiasm for the auto industry. Another analyst, David Eisenberg of Sanford C. Bernstein & Co., also is talking of exploding earnings for Ford and GM. He, in fact, expects profits of both companies to exceed $20 a share in 1983.
Here're the specifics: GM -- $2.55 a share in '80, $8.40 in '81, $15.60 in '82 and $22.05 in '83. For Ford -- a loss of 80 cents a share this year, followed by a profit of $8.35 in '81, $13.40 in '82 and $20.85 in '83.
As bleak as the environment now seems, it contains the seeds of a dramatic industry recovery, Eisenberg says.
The chief spark: a sustained surge in replacement demand, spearheaded by new model introductions that are far superior to their predecessors -- both technologically and functionally.
Accordingly, he expects imports to take a decreasing bite out of the U.S. auto market -- with a drop to 23 percent in '81 and a further decline to around 18-19 percent by '83-'84.
Well, there's the thinking of two savvy analysts. How right (or wrong) they are is anybody's guess; one should also assume that Toyota and Datsun are not about to roll over and play dead.
On the plus side, though, it's worth recalling the way a lot of sophisticated investors make big money in the market. They buy a stock when nobody wants it and sell when everyone's clamoring for it. And Ford and GM -- unless the country's going down the drain -- are not going to reside in the doghouse forever.