Analysts React to GM's Restructuring, Job Cuts
November 21, 2005 1:04 p.m.
The announcement that General Motors Corp. would eliminate 30,000 jobs over the next three years brought some cautious optimism from analysts. While a few suggested that the car maker would benefit from a lower cost structure, there is worry about other overhanging issues, including liabilities from bankrupt auto-parts maker Delphi, reduced income from finance subsidiary General Motors Acceptance Corp., and pricing pressures. (Disclosures follow.)
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GM's plan to reduce production capacity by a net 800,000 units in North America is a necessary, though not sufficient step, toward a return to profit in North American operations. The key to the ultimate success of this plan will be whether it is accompanied by at least flat market share, in our view. Each point of share in the U.S. is worth roughly $1 billion of variable profit; thus a loss of 2-3 points of share would offset plan benefits.
--Jonathan Steinmetz, Morgan Stanley analyst, who has an "equal-weight" rating on GM's stock.
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We encourage longer-term investors to systematically add to or establish positions in GM as we remain confident that the company is on the brink of a financial and product turnaround. We concede that it has been a bumpy ride lately for GM shareholders and we expect the shares could remain volatile in the near-term. That said, we continue to be longer-term believers in GM's profit turnaround.
--Joseph Amaturo, analyst at Calyon Securities, who has an "add" rating on the stock.
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We are concerned that benefits will be offset by ongoing [market]-share loss, price pressure, lower income from GMAC, and liabilities from Delphi… elements of the plan have not yet been approved by the United Auto Workers, adding uncertainty and potentially requiring some giveback to the UAW on Delphi negotiations, which we see as linked. We are not confident that the restructuring addresses the core issue that GM brings too much supply to the North American market…. Once the headline euphoria fades, we think attention turns to the many offsetting headwinds we've mentioned, which keeps pressure on GM shares.
--Robert Barry, Goldman Sachs analyst, who has an"underperform/cautious" rating on GM.
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Broadly speaking, the magnitude of the cuts was ahead of our expectations, and the timing of the cuts was also more front-end loaded than we expected (i.e., most in 2006). In addition, the company hinted that GM may play a role in Delphi's restructuring, potentially minimizing strike risk.
--Himanshu Patel, J.P. Morgan Chase analyst, who has an "overweight" rating on the stock.
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The plan is essentially as expected, meaning not terribly aggressive. We estimate the cuts imply that GM is expecting to operate at 25% share, similar to current levels. Given steady share losses, this may prove optimistic.
--Rob Hinchliffe, UBS analyst, who has a "reduce 2" rating on the stock and a $20 target.
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Higher borrowing costs at GMAC from low GM credit ratings are adversely affecting GMAC's earnings -- 2006 earnings could decrease by $1 billion as result of higher interest costs. To maintain the viability of GMAC, we anticipate that GM will sell off a controlling interest. We value GMAC at $22 billion. Proceeds of $11 billion from the sale of controlling interest (51%) should support restructuring and liabilities.
--Jon Rogers, analyst at Citigroup Global Markets, who has a "sell" rating on GM, and reduced his price target to $22 a share from $27 a share.
Disclosures:
• Morgan Stanley owns 1% of the equity in General Motors, and in the past 12 months, has managed or co-managed a public offering of securities of General Motors. The company has also received investment-banking and non-investment compensation from GM in the last 12 months.
• Goldman Sachs owns more than 1% of General Motors, has received compensation for investment-banking and non-investment banking services from the company, and is a specialist in the securities. In addition, one of GM's directors is a director at Goldman Sachs.
• Calyon Securities has received compensation from GM for non-investment banking services in the past 12 months.
• Citigroup owns at least 1% of the shares of GM, has acted as a manager or co-manager of a public sale of GM's securities in the last 12 months, has been compensated for investment banking and non-investment banking, and makes a market in the stock.
• UBS has acted as manager or co-manager in the underwriting of GM securities in the last 12 months, received compensation for investment banking and non-investment banking services, and acts as a broker to the company.
• J.P. Morgan Chase has been a lead or co-manager in a public offering of equity and or debt securities for General Motors within the past 12 months, makes a market in the stock, owns 1% or more of the company's equity and has provided investment banking and non-investment banking services to GM. |
