GM Forecasts Quarterly Loss; Stock Plunges
Beset by slumping U.S. sales, General Motors Corp. on Wednesday slashed its earnings forecast for the rest of the year.
GM’s shares were hammered, dropping 14% to their lowest price in 10 years.
In the first two months of 2005, GM’s sales in this country fell 9.9% and its market share hit a record low of 24.4%. In those same two months, rivals including Toyota Motor Corp., Nissan Motor Co., BMW and Hyundai Motor Co. posted U.S. sales gains.
One particular problem for GM: The popularity of its mainstay large pickup trucks and SUVs has waned because of rising oil prices.
Abandoning its earlier forecast of a break-even first quarter, GM said it expected to post a loss of about $848 million, or $1.50 a share, when its earnings report is filed April 19.
The announcement from the world’s biggest automaker prompted Standard & Poor’s to lower its outlook on the company’s bonds to “negative,” moving them one step closer to a junk bond rating.
“This first-quarter decline is serious enough to make management believe it can no longer make a profit in the North American auto market at its current level of costs, capacity, employment and pricing,” said David Healy, auto industry analyst for Burnham Securities Inc.
GM’s stock dropped $4.71 to $29.01 in New York Stock Exchange trading. That put its market value at $16.4 billion -- less than motorcycle maker Harley-Davidson Inc. and one-eighth that of Toyota.
Contributing to GM’s problems are the cost of sales incentives, averaging more than $3,000 per vehicle over the last few years. The company began its incentives program to keep car sales moving after the Sept. 11, 2001, terrorist attacks and has found it difficult to stop, GM Chief Executive Rick Wagoner said.
Dealers complain that big incentives tend to weaken product image and can turn customers away.
“GM just doesn’t have anything people want to see,” said Frank Zicker, fleet manager at Santa Monica Auto Group, Chevrolet-Buick. “They haven’t done anything right for a long time.”
Zicker faults GM for not jumping on the gas-electric hybrid bandwagon and for focusing its advertising on bargain prices rather than on products and features.
“If we had a good hybrid or something else people wanted, we could get people into our showrooms and then we could sell,” he said. “You can’t sell cars if people aren’t looking.”
Although GM hired former Chrysler product guru Bob Lutz to revitalize its lineup with bold new styling to captivate shoppers, analysts and critics said there was still little excitement in dealer showrooms. Recent products such as the Chevrolet Cobalt, Pontiac G6 and Buick LaCrosse sedans -- with designs influenced by Lutz -- are not selling well and carry the highest incentives in the industry this year, according to Edmunds.com.
GM has enjoyed some successes; the redesigned Chevrolet Malibu models and the Corvette sports car are doing well. But even Chevrolet, the best-performing of GM’s brands, has seen U.S. sales drop by 3% this year.
In addition, many buyers continue to favor the reliability of Asian cars. Consumer Reports’ top 10 models for 2005 consist of nine Japanese vehicles and one Ford. GM was shut out.
“Clearly we have significant challenges in North America,” Wagoner said in a conference call with analysts and reporters. North American operations are GM’s “800-pound gorilla” and “our biggest business, and the key driver of automotive earnings,” he said, adding that it was crucial for GM to “get it right.”
The company’s woes are exacerbated by rising retirement and healthcare costs. GM spends more than $5 billion a year on healthcare for current and retired workers, Wagoner said, making it the largest private provider of healthcare in the U.S. GM’s health and retirement costs average almost $1,800 per vehicle, far more than Japanese and South Korean carmakers spend. His vow to “get it right” apparently will mean more cuts and increased lobbying by GM for medical cost reforms.
“I think the weakening profitability this year has focused on our need to make progress on healthcare,” said John Devine, GM’s chief financial officer.
Wagoner said the retirement and healthcare costs made it difficult for GM to cut prices to compete with imported brands. But as the principal reason for the forecast downturn the company cited declining sales.
GM expects many of its problems to continue all year. It anticipates that full-year earnings will drop to $565 million to $1.1 billion, or $1 to $2 a share, from a much rosier previous forecast of $2.3 billion to $2.8 billion, or $4 to $5 a share. Cash flow for the full year is expected to dive to a negative $2 billion.
Separately Wednesday, Ford Motor Co. said it expected profit this year to be at the “lower end” of its forecast of $1.75 to $1.95 a share. “The market is not getting any easier,” Ford Chief Financial Officer Don Leclair said.
GM’s announcement reverberated, affecting many publicly traded auto parts suppliers.
“There isn’t anybody who doesn’t have at least some business with GM,” said Jim Gillette, an analyst with CSM Worldwide.
Although some auto industry watchers have suggested that GM may have to file for bankruptcy protection to work its way out of its problems, analyst Healy predicted that GM would get smaller instead.
GM will launch “a major restructuring in North America,” he said, “and we’ll see fewer employees, fewer factories, anything to downsize so they can make money at the volume they are at now, because competition is such that they aren’t going to grow much anymore.”
