GM Heads for the Junkyard
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growthreport.com
Volume 5, Issue 28
March 17, 2005
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The automobile giant is shrinking fast.
According to S&P and Fitch Ratings, General Motors (GM), still the world’s largest automobile manufacturing company (though not by much), currently has one foot in the grave and the other on a banana peel. That’s how close GM is to having its bonds officially declared as ‘junk’ by the financial industry’s largest and most well respected ratings agencies.
On Wednesday, S&P affirmed its long-term ratings on GM and General Motors Acceptance Corp. at ‘BBB-minus,’ one step above ‘junk’ status, as Fitch rated it with a ‘negative’ outlook, again just one step above junk. What’s suddenly so wrong with GM? Just about everything. Not only has the company recently warned that 2005 earnings will be as much as 80 percent below its prior forecast due to slumping North American auto sales, but has also reported that its market share within North America – its home turf – has fallen to less than 25 percent.
GM is now forecasting full-year earnings of about $1.00 to $2.00 per share, down from its previous target of $4.00 to $5.00 a share. In 2004 GM earned $3.6 billion, or $6.40 a share, from continuing operations, though it now expects a first quarter loss of about $1.50 per share. The company, of course, blames ballooning healthcare costs, higher fuel prices, and new product lines that won’t be out for another year (vehicles which will continue to be gas guzzlers!) as excuses for its own mismanagement. Yet, as investors have learned the hard way, the company has no one to blame but itself.
Big (funny) Business
In cases of severe corporate crisis, it’s always fun to match fact against fiction – or in the case of GM and the other two of the Big Three automakers, fact versus fantasy.
First, some facts: Higher fuel prices are hurting overall sales of SUVs and pickup trucks, sales which account for nearly 80 percent of North America automobile profits at GM and Ford (F). GM’s domestic SUV sales declined by 9 percent in February while Ford’s sales in the same category dipped by 8 percent. (Interestingly, sales of Toyota’s Tundra pickup truck and Nissan’s Titan each rose by nearly 50 percent for the month.) Overall, the SUV segment lost 1.2 percent market share during January and February 2005; the pickup truck segment lost 2 percent market share over the same period. Companywide, GM’s sales were down 12.7 percent across the board for February. Meanwhile, fuel efficient compact cars gained 2.2 percent market shared during those same two months.
More facts: GM sold a total of 9 million vehicles in 2004, up 4.1 percent from a year earlier while Toyota increased its sales by 10 percent to 7.5 million vehicles, heading to sales of 8 million cars and trucks in 2005. (Even GM’s CEO, Rick Wagoner, had to concede that Toyota could overtake GM as the world’s largest automobile manufacturer.) Moreover, sales for Toyota’s market leading hybrid, the Prius, are booming. The Prius owns 60 percent of the hybrid market, and Lexus, Toyota’s luxury brand, is introducing its first luxury hybrid SUV, the 400h, for which it has already taken 12,000 deposits and has plans to sell 27,000 units annually.
GM’s response? Bob Lutz, Vice-Chairman of General Motors has stated that hybrids, “just don’t make business sense.” Here’s where fantasy and fiction come into play. GM loves gas-guzzling heavy metal because that’s where they make their fattest margins. Fat margins please Wall Street because they imply that flat or declining sales might still yield plump bottom lines. Thus, investors should still, theoretically, be bidding up GM’s stock even without waiting lists for General Motor’s gas-guzzling trucks. In fact, it would seem that Toyota, with its more fuel efficient line-up of thinner margin vehicles, would be no match for fat and happy Detroit. If we were to take Lutz at his word, hybrids would be such a dumb business to invest in – they barely make any money at all on those Prius’ – Wall Street should actually be penalizing Toyota for placing any emphasis on those markets at all.
But, as the saying goes, markets never lie. So as GM trades at 6 times trailing earnings to Toyota’s 11 times trailing 12-month EPS, and as GM’s stock suffers near its 52-week lows at roughly $33 per share, down 30 percent over the last year, either Lutz is crazy or blind or Detroit is deaf or dumb. My hunch is it’s as much a strong dose of the former as it is a good helping of the latter.
Poor GM
Sometimes, when death is knocking on the door, it’s better not to answer.
Besides declining sales and loss of market share, GM’s got a few other things stacked against it. First, it’s got an $86 billion pension fund it must manage and that’s a big, expensive, time-consuming proposition. Second, in covering 1.1 million workers, retirees and dependents, GM is the single largest healthcare provider in the nation – and that doesn’t come cheap. GM spends more than $5 billion a year on medical bills -- the equivalent of $2000 per car. (Toyota, by the way, spends a minimal amount, if any, on healthcare, as it is offered largely free of charge by the Japanese government.) Last, any of the foreign manufacturers who have become interested in locating here have likely garnered rich tax incentives for years to come – tax savings the Big Three don’t enjoy.
Though the yen has gained mightily against the dollar, making imports expensive and US goods cheap, that dynamic still hasn’t played out as strongly as the Big Three would have hoped. Car buyers still want the cars they love to drive; and the cars they love to drive are hardly those made by Ford or GM these days.
Financially, though GM still has roughly $23 billion in cash, it is also nearly $3O billion in debt. And its solution? The company says financially things should improve significantly in 2006 and 2007 because that’s when a new generation of, yep, large sport utility vehicles and pickup trucks hit the market. Why would GM try and fix what ails it with – well, what ails it? Perhaps it’s addicted to large vehicle sales and those fat margins, margins that are supposed to rekindle its bottom line; but won’t. Perhaps, it (alone) thinks the price of fuel at the pump is going to come down, or at least flatten sometime soon; they won’t. Perhaps it’s convinced that the mystery of hybrid fuel efficient vehicles is such a niche market it’s ok to sit that one out while market penetration and market share for Toyota just grows and grows and grows.
Or perhaps, as one of the largest companies in the world, it simply believes in its own manifest destiny – and if so, that’s dangerous territory within which to tread.
It’s my opinion that the world is passing GM right by. Toyota is proving this as we speak. It may take a year, it may take 10 years, but GM needs a radical makeover (starting with an equally radical change in CEO) in order to execute the turnaround of the century. Will it happen? I doubt it. Wagoner is no Lee Iacocca, the former Chrysler Chairman who turned his company around when it was on the brink of disaster. GM would have to kill its own love affair with large trucks and SUVs, ditch its healthcare responsibilities, and get rid of its heavy debts in order to retool for a coming world where higher fuel prices are here to stay. That’s a lot of heavy lifting for a company so in denial it sees hybrids as just a passing fancy. The stock, unfortunately, appears headed straight for the junkyard. |
