GM's Wild Ride

June 27, 2008
The last time we saw numbers like these, General Motors designers hadn't even fitted fins to their Cadillacs. The classic '57 Chevy was just a gleam in a marketer's eye. And the post-war Eisenhower boom had hit an unexpected speed bump. Lately, it looks like the entire economy is heading for the ditch, and the auto industry is leading the way.

With fears mounting that GM might be running short of money needed to fund its turnaround, investors have driven its shares down to a 53-year low, the numbers tumbling by 11 percent on Thursday to a mere $11.43 a share.

Of course, it hasn't helped that the entire stock market is in the midst of Mr. Toad's Wild Ride, stocks buffeting up and down, sometimes in seemingly random patterns. But analysts say that the concerns about GM are well-grounded. There is, first of all, the overall slump in the U.S. motor vehicle market, which will likely come in, for all of '08, somewhere in the mid-14 million range, off close to 20 percent from the industry's peak. The giant automaker, in particular, has been hard hit, considering the sharpest sales declines have come on the truck side of the business, which long propped up GM's balance sheet. Now come well-sourced rumors suggesting the company will cut its dividend in a bid to preserve cash.

It didn't help to have the influential investment firm, Goldman Sachs, issue a research note warning of "significant shareholder dilution," should GM need to raise new capital through additional financing. Meanwhile another key analyst, Joe Armaturo of Buckingham Research, predicted the automaker's shares will tumble to an $8 low, as it searches for funds to cover a "significant...cash burn."

A sizable portion of that burn comes from GM's product development operations, which are desperately racing to replace low-mileage trucks with fuel-efficient passenger cars. But there are serious concerns about what happens once this transition is completed. GM and its domestic brethren are second-tier players in most of the U.S. passenger car segments, most of their offerings commanding lower prices than the imports - even before you add in hefty incentives.

There are signs that GM can fight back, as new products, such as the 2008 Chevy Malibu, win over critics and consumers alike. If anything, while slashing truck production, the automaker is struggling to ramp up output of Malibu and several other new models. But carving space in this segment will be an intense and costly battle, all the worse when going up against well-funded competitor Toyota.

Incidentally, if this scenario sounds familiar, it has more than a few echoes of the situation that played out following the last big oil shock in the early 1980s. GM spent billions in a largely unsuccessful bid to use products like the original Chevy Cavalier to drive the Asians back into the sea. Ultimately, as oil prices stabilized and consumers forgot about their pain at the pump, GM made a wholesale shift to high-profit, low-mileage trucks. But few believe that pattern will play out yet again.

Incidentally, Ford shares closed at a weak $5.07 on Thursday, a 3.2 percent drop. At one point, the stock hit a 52-week low of $4.94, a sharp decline from the $9.70 it had hit during the last year.

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