GM Slashes First-Quarter Outlook on U.S. Sales Slump

March 16, 2005; Bloomberg reported that General Motors Corp., the world's biggest automaker, forecast its largest quarterly loss since 1992 as Toyota Motor Corp. takes market share in North America and near-record fuel prices erode sales of sport-utility vehicles.

GM, based in Detroit, today predicted a first-quarter loss of $1.50 a share, slashed its estimate for annual profit by more than 50 percent and restated a 2004 fourth-quarter profit as a loss. GM shares dropped 12 percent, the biggest decline since 2001, and bonds plunged as Standard & Poor's lowered its outlook on the company to negative.

``General Motors North America is our 800-pound gorilla, and today's announcement shows how important it is to get it right,'' Chief Executive Rick Wagoner, who has led the company since June 2000, said today in a conference call with investors. His tenure has been marked a 55 percent decline in the company's market value to $16.6 billion, eight times smaller than Toyota.

The threat that GM's credit rating may be cut to junk status sent investors scurrying for the safety of U.S. Treasury bonds and pulled down U.S. stock indexes. General Motors is the third- biggest corporate debtor and the sixth-largest employer in the U.S.

GM bonds are already trading as if they've been cut to below investment grade, meaning the company may have to pay more to borrow money in the bond market. Standard & Poor's rates GM bonds BBB-, one level above junk, and Moody's Investors Service rates the company Baa2, two steps above junk. Moody's today said it's reviewing the ratings for a possible downgrade.

Ford Motor Co., the second-biggest U.S. automaker, affirmed a Jan. 25 forecast and said its 2005 profit will be $1.75 to $1.95 a share, excluding some costs.

Burdens

GM's rising health-care and debt costs are combining with dwindling sales to push the company into a loss at a time when Toyota and Nissan Motor Co. are taking away market share.

GM's U.S. sales dropped 10 percent in the first two months of 2005, and sales of its largest SUVs declined 28 percent with rising fuel prices. Toyota's share rose to 13.1 percent from 12.1 percent in the first two months.

GM's share of the U.S. market is below 25 percent this year for the first time since 1998, when a strike shut down much of its production. As recently as last year, GM executives sported lapel pins bearing the number ``29,'' indicating their market- share ambitions.

``They've decided it's time to get the smiley face off and get some important business done,'' said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan. ``GM has decided that things are going to be tough, let's make them real tough, and lets get at some of these things that have been an anchor on their ability to function.''

The Fiat Effect

GM last month said it would spend $2 billion to end a five- year alliance with Italy's Fiat SpA. That resulted in a $886 million, or $1.56 per share expense, that is being charged to the fourth quarter 2004, GM Chief Financial Officer John Devine said on a conference call.

The adjustment cut 2004 net income to $4.95 a share from $6.51 a share previously reported, according to a filing today with the U.S. Securities and Exchange Commission. That adjustment, offset by another accounting change, also meant the company is now reporting a fourth-quarter loss of $95 million, or 17 cents a share, compared with the original profit of $630 million, or $1.11 a share, according to the filing.

GM had expected to break even in the first quarter and have a profit of $4 to $5 a share for the year, excluding certain items. The first-quarter loss may prompt ratings companies to cut GM's debt to junk status as early as this year, said Argus Research analyst Kevin Tynan.

``This company simply has not performed,'' said Tynan, who is based in New York. ``The new products and the upcoming products really have not done the job.''

Banking on New Products

Wagoner has said he's counting on new-car models such as the Pontiac G6, Buick LaCrosse and the Chevrolet Cobalt to help GM gain buyers this year after U.S. sales fell 1.1 percent last year.

Those three models had the highest average rebates of any new car so far this year, according to Edmunds.com, which tracks vehicle prices and incentives for consumers. The G6 price was discounted 19 percent compared with an average of 9 percent for all new models in February.

The sales of those models are accelerating, Devine said. With the addition of other new models, such as the Hummer H3 SUV, the Chevrolet HHR and redesigned versions of the Chevrolet Monte Carlo and Impala, the sales outlook will improve, he said.

$116 Billion Bond Debt

GM, which has $116 billion of outstanding bond debt, is facing increasingly higher interest costs.

The extra yield, or spread, investors require to buy the company's euro-denominated debt instead of safer government bonds jumped, indicating investors perceive an increased risk in owning the debt. The spread on GM's 8.375 percent bonds due 2033 widened 38 basis points, or 0.38 percentage point, to a record 494 basis points, according to Royal Bank of Canada prices on Bloomberg.

The company may be forced to suspend its quarterly dividend of 50 cents a share to stem losses, said Wil Stith, a portfolio manager on a team managing about $2 billion of fixed-income investments at MTB Investment Advisors in Baltimore.

The probability of GM making money this year ``has gone down rather substantially,'' Stith said. ``They're going to have to execute well on their new product lines.''

Stock Drops

GM shares dropped $4.11, or 12 percent, to $29.61 at 2:03 p.m. in New York Stock Exchange composite trading. The projected first-quarter loss would be the largest since the company had a loss of $1.1 billion, or $1.86 a share, in the third quarter of 1992.

GM hasn't had a quarterly loss since posting a $804 million loss, or $1.42 a share, in the third quarter of 2002.

It hasn't had a first-quarter loss since 1992, according to data compiled by Bloomberg. The company ousted Chief Executive Robert Stempel on Oct. 26. of that year.

The average first-quarter estimate among 13 analysts surveyed by Thomson Financial was for a loss of 3 cents. The analysts forecast a $3.33 a share profit for the year.

The automaker had net income of $1.28 billion, or $2.25 a share in the first quarter last year, and $3.69 billion, or $6.51 a share, for 2004. Excluding extraordinary items, the automaker earned $6.40 a share last year. GM doesn't provide a net income forecast, spokesman Jerry Dubrowski said. He declined to identify the special items.

Lower Production

The company on March 1 said first-quarter North American production would fall 12 percent from a year earlier to 1.18 million cars and trucks, less than its original plan of 1.25 million when the quarter started.

``North America is a tough market,'' said Daniel Poole, an analyst at Cleveland-based National City Bank. ``Their products are doing OK: no home runs but no strike outs.'' Poole said his company owns some GM shares and that he has neutral rating on the company.

GM also said it now expects cash flow for the year to be negative $2 billion, a $4 billion decrease from the Jan. 13 forecast of a positive $2 billion, as net income in North America declines.

The company said it still expects capital spending to rise about $1 billion from 2004 to $8 billion, according to the statement. The company is investing in U.S. truck plants to get ready for the next generation large trucks such as the Chevrolet Suburban SUV and GMC Sierra pickup that begin to go on sale next year.

Health Care

GM said Jan. 13 its health-care costs will rise to about $5.6 billion this year from $5.2 billion in 2004 and $4.8 billion in 2003.

The automaker's U.S. market share fell below 25 percent in the first two months of this year for the first time since August 1998, when a strike shut down much of its production. GM's market share peaked at 51 percent of the U.S. market in 1962 and the last time it had less than a quarter of the U.S. market was 1925.