What GM Needs to Keep Rolling
When General Motors announced its 0% financing program in late September, the company said it needed an aggressive plan to spur auto sales and keep the economy moving following the September 11 terrorist attacks. Even the U.S. Commerce Dept. was asking GM (GM) to help boost the economy by offering deals on cars and keeping its plants running. Lo and behold, it seems to have worked.
In October, Americans were buying cars at an annualized pace of more than 21 million vehicles -- 4 million more than the industry's best year ever. The boost was so strong that the auto industry almost single-handedly pushed retail sales up 7% that month, even as the economy was headed into a recession. For GM, the gambit lured plenty of new buyers, pushing its own monthly share of the U.S. vehicle market in October up to 31.6%, from 30.1% a year earlier. With the no-interest loans, GM proved the old axiom that what's good for GM is good for the economy.
In 2002, however, the opposite will be true -- GM will need the economy to give it a boost for its stock to outperform the market. Closing at $51.59 a share on Dec. 7, the stock trades miles off its April, 2000, peak of $92 a share. GM isn't alone. Auto stocks have been sinking all year, as investors see the industry's fate as being directly tied to consumer confidence and the economy.
BEST OF THE BUNCH? If growth starts picking up in the second quarter, as some analysts predict, however, GM will get positive attention. "The only time to own [auto] stocks is when the economy and the stocks are in the toilet," says Sanford C. Bernstein analyst Scott Hill. "As soon as investors think the economy is recovering, they will outperform."
GM might be the best bet among the carmakers. While 2001 has been a tough year the industry, the company still is making money. Its rivals, Ford Motor (F) and DaimlerChrysler (DCX), have been in the red. Moreover, GM has the best prospects to make money and gain market share next year. It has stolen the very profitable pickup truck and sport-utility vehicle markets back from Ford, analysts say.
And they note that of the Big Three, GM has the most new products coming to market next year to offset what are expected to be falling industry sales. "GM is having tremendous success with its truck portfolio and will for the next 18 to 24 months," says UBS Warburg analyst Saul Rubin. "They are managing far better than Ford or Daimler."
PENSION SNAG. Some tremendous risks remain, however. If the economy doesn't recover, Hill says, then even GM will have a tough time making money. In 2002, most analysts predict the auto industry will sell between 15 million and 15.5 million cars and trucks -- well off this year's 16.7 million vehicle pace. Unless GM picks up market share, it could be dangerously close to breaking even. In a market of 15 million vehicles, GM would have to garner more than its recent annual share of 28%, needing to sell close to 5 million vehicles to stay in the black. GM is on pace to sell about 4.8 million to 4.9 million vehicles this year.
Another possible snag: GM has so many retirees that it may need to cut into its own earnings to keep its pension funds flush. That will be especially true if the market stalls and GM's pension-fund investments don't grow fast enough. Still, GM Vice-Chairman and Chief Finance Officer John M. Devine says, "we think that in next year's market we can remain profitable."
Most analysts agree. The economy -- and vehicle demand -- shouldn't fall too hard next year. The industry hasn't been able to raise prices in five years, so cars are very affordable, says Burnham Securities analyst David Healy. That should keep car sales afloat.
PICKUP IN PICKUPS. New products also give GM some staying power. Next year, it'll launch the Cadillac CTS midsize luxury sedan, an all-new Saturn SUV called the Vue, the low-priced Pontiac Vibe sporty hatchback, and it will add more seating to its popular Chevrolet Trailblazer SUV. Better still, GM's Chevrolet Silverado and GMC Sierra pickups are stealing market share from Ford's F-series, says James Hall, vice-president of consultant AutoPacific in Detroit. Says Hall: "GM's share should go up next year, but I don't know how much."
That's why analysts say GM should make more money than Ford. They forecast that GM will make $1.8 billion this year and $1.1 billion next year, vs. Ford's forecasted $880 million loss this year and $641 million in profits next year. Says UBS Warburg's Rubin: "GM is moving its product mix from low-margin cars to high-margin trucks."
Still, the stock's success rests largely on the economy. Sanford C. Bernstein's Hill says auto shares will gain ground only if gross domestic product (GDP) grows 1.5% to 2% by the end of 2002. That would send a clear enough signal to investors that the economy is making a comeback, and cyclical investments like car companies are worthwhile.
"It's an economic play," he cautions. "If the economy doesn't recover, these stocks will underperform." And GM won't be able to jump-start America with interest-free loans the next time around
In October, Americans were buying cars at an annualized pace of more than 21 million vehicles -- 4 million more than the industry's best year ever. The boost was so strong that the auto industry almost single-handedly pushed retail sales up 7% that month, even as the economy was headed into a recession. For GM, the gambit lured plenty of new buyers, pushing its own monthly share of the U.S. vehicle market in October up to 31.6%, from 30.1% a year earlier. With the no-interest loans, GM proved the old axiom that what's good for GM is good for the economy.
In 2002, however, the opposite will be true -- GM will need the economy to give it a boost for its stock to outperform the market. Closing at $51.59 a share on Dec. 7, the stock trades miles off its April, 2000, peak of $92 a share. GM isn't alone. Auto stocks have been sinking all year, as investors see the industry's fate as being directly tied to consumer confidence and the economy.
BEST OF THE BUNCH? If growth starts picking up in the second quarter, as some analysts predict, however, GM will get positive attention. "The only time to own [auto] stocks is when the economy and the stocks are in the toilet," says Sanford C. Bernstein analyst Scott Hill. "As soon as investors think the economy is recovering, they will outperform."
GM might be the best bet among the carmakers. While 2001 has been a tough year the industry, the company still is making money. Its rivals, Ford Motor (F) and DaimlerChrysler (DCX), have been in the red. Moreover, GM has the best prospects to make money and gain market share next year. It has stolen the very profitable pickup truck and sport-utility vehicle markets back from Ford, analysts say.
And they note that of the Big Three, GM has the most new products coming to market next year to offset what are expected to be falling industry sales. "GM is having tremendous success with its truck portfolio and will for the next 18 to 24 months," says UBS Warburg analyst Saul Rubin. "They are managing far better than Ford or Daimler."
PENSION SNAG. Some tremendous risks remain, however. If the economy doesn't recover, Hill says, then even GM will have a tough time making money. In 2002, most analysts predict the auto industry will sell between 15 million and 15.5 million cars and trucks -- well off this year's 16.7 million vehicle pace. Unless GM picks up market share, it could be dangerously close to breaking even. In a market of 15 million vehicles, GM would have to garner more than its recent annual share of 28%, needing to sell close to 5 million vehicles to stay in the black. GM is on pace to sell about 4.8 million to 4.9 million vehicles this year.
Another possible snag: GM has so many retirees that it may need to cut into its own earnings to keep its pension funds flush. That will be especially true if the market stalls and GM's pension-fund investments don't grow fast enough. Still, GM Vice-Chairman and Chief Finance Officer John M. Devine says, "we think that in next year's market we can remain profitable."
Most analysts agree. The economy -- and vehicle demand -- shouldn't fall too hard next year. The industry hasn't been able to raise prices in five years, so cars are very affordable, says Burnham Securities analyst David Healy. That should keep car sales afloat.
PICKUP IN PICKUPS. New products also give GM some staying power. Next year, it'll launch the Cadillac CTS midsize luxury sedan, an all-new Saturn SUV called the Vue, the low-priced Pontiac Vibe sporty hatchback, and it will add more seating to its popular Chevrolet Trailblazer SUV. Better still, GM's Chevrolet Silverado and GMC Sierra pickups are stealing market share from Ford's F-series, says James Hall, vice-president of consultant AutoPacific in Detroit. Says Hall: "GM's share should go up next year, but I don't know how much."
That's why analysts say GM should make more money than Ford. They forecast that GM will make $1.8 billion this year and $1.1 billion next year, vs. Ford's forecasted $880 million loss this year and $641 million in profits next year. Says UBS Warburg's Rubin: "GM is moving its product mix from low-margin cars to high-margin trucks."
Still, the stock's success rests largely on the economy. Sanford C. Bernstein's Hill says auto shares will gain ground only if gross domestic product (GDP) grows 1.5% to 2% by the end of 2002. That would send a clear enough signal to investors that the economy is making a comeback, and cyclical investments like car companies are worthwhile.
"It's an economic play," he cautions. "If the economy doesn't recover, these stocks will underperform." And GM won't be able to jump-start America with interest-free loans the next time around
