Posted on: Tuesday, April 12, 2005
Auto giants' shares stuck in reverse gear
By Matt Krantz and Sharon Silke Carty
USA Today
Shares of Ford Motor and General Motors are in serious need of Wall Street's version of roadside assistance.
Shares of the top two U.S. automakers have sputtered more than 25 percent this year after a string of bad sales and earnings news. The latest hit came yesterday when an earnings warning from Ford late Friday sent its shares down 59 cents to $10.44, a two-year low. The selling spilled over, dragging GM down 25 cents to $29.25.
The sharp drop in the stocks may look tempting considering the companies' reputations as icons of American industry: Both have rock-bottom 2004 price-earnings ratios and pay fat dividends.
Analysts and investors caution that neither GM nor Ford may be the bargains they appear. "Fixing them will take a long time," says David Healy, analyst at Burnham Securities. "There's no rush to buy the stocks." Reasons include:
• Rapidly deteriorating earnings. At the beginning of the year, analysts were calling for GM to earn $1.08 for the first quarter, says Thomson First Call. Now, just four months later, they're calling for a $1.49-a-share loss. That makes the stock's 2004 P-E ratio of 6 meaningless, says Robert Hinchliffe, analyst at UBS. Based on estimated 2005 earnings, the company has a P-E of 59.
• Shrinking market share. The best way for auto companies to heal themselves is by releasing not just one hit vehicle, but a string of them, says Efraim Levy, stock analyst at S&P who rates both GM and Ford a sell.
A bevy of products launched in the fall were supposed to lift Ford's sales. But critics weren't impressed, and market share continues to erode. Ford's products haven't been able to attract buyers from other brands, says Jesse Toprak of consumer Web site Edmunds.com.
• Doubtful dividends. Because Ford already cut its dividend by about half four years ago, another reduction is possible but not likely, says Brett Hoselton, analyst at KeyBanc Capital. But GM's rich dividend is at risk. Cutting the dividend in half would save GM a much-needed $565 million a year, Levy says. "When earnings go down, they cut the dividend," he says.
• Uncertain credit outlook. Friday, shortly after Ford cut its earnings outlook, S&P slapped a "negative" outlook on the company's debt. Ford debt was already a step away from junk, as is GM's. A reduction of a debt rating to junk would boost their borrowing costs.
Not everyone is as bearish. Bernie Schaeffer at Schaeffer's Investment Research says much of the bad news is already baked into shares of GM and Ford. While he wouldn't recommend buying the stocks, he doesn't urge selling them to buy something else, either. At least Ford's and GM's problems are known.
