Sunday Stew: GM's Woes
The auto industry is in the toilet and General Motors is being flushed head first. You might have noticed the massive hit GM stock took in the last few weeks. That came after the company announced sales for the last quarter were off 12 %. That makes sense--GM relies on sales of their SUVs & right now, off-the-chart energy costs are nailing sales. GM has been around since 1931, but its clear they've seen better days. The stock is close to a 2 year low. So what's the problem?Instead of breaking even in the first quarter, it now expects a first-quarter loss of $1.50 per share. Instead of earning $4 to $5 for the year, the best that investors can expect is $2. Cash flow will be a negative $2 billion, not the positive $2 billion the company forecast as recently as Jan. 13. If you erased the company name from the balance sheet and showed it to a forensic accountant, the recommended treatment would probably be to seek protection from creditors by filing for Chapter 11 bankruptcy. It worked for the airline industry...Here's my diagnosis: One, their global expansion plan is failing. They can't keep up with Toyota, which I predict will take over the top spot soon enough. Two, employee benefits at GM are costly. Right now, the company pays for all employee health insurance premiums--they could save over 400 million a year of they made workers pay even a fraction of them. Every General Motors worker bears the pension and health-benefit burdens of 2 1/2 retirees, according to one Bloomberg analyst. Third, debt, debt, debt. General Motors has a market value of about $16 billion, but it owes its bondholders more than $115 billion. Standard & Poor's this week cut the outlook on its BBB rating on GM, the lowest investment grade level. This is a direct result of the fact that GM is too big--they need to pare down their brand line and scale down company size. They have quantity, but not quality. Keep what's hot--discard what isn't working. The idea that GM can sustain 28% market share is unrealistic.
I don't know--maybe a GM breakup is in the works, if not that Chapter 11 execs are trying to evade.
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