Automotive Update

There has been plenty of automotive sector news recently, so let's take a quick look:

After today's closing bell MarketWatch reports that Ford Motor Co. (F) cut its 2005 earnings forecast to $1.25 to $1.50 a share, citing difficult business conditions in the automotive sector. Ford previously said it expected 2005 earnings of between $1.75 and $1.95 a share. Analysts polled by Thomson First Call are currently expecting 2005 earnings of $1.64 a share. The automotive giant also said that it doesn't expect to reach its goal of $7 billion in pre-tax profits, excluding special items, as early as 2006. Ford said it expects its first-quarter earnings to exceed its previous forecast of 25 cents to 35 cents a share. Analysts are looking for first-quarter earnings of 36 cents a share. The company said it still expects its automotive operating cash flow to be positive for the year.

The S&P revised Ford's credit outlook rating to 'negative' from stable. S&P said the revision reflects heightened concerns regarding Ford's profit potential after the automaker significantly revised its 2005 earnings and cash flow forecasts. S&P also affirmed Ford's "BBB-" long-term and "A-3" short-term debt ratings.

Mish comment:
Once again the S&P wimps out in leaving Ford's debt at "Investment Grade".
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GM Stops Buying Ads in The LA Times after pulitzer Prize-winning Los Angeles Times auto critic Dan Neil sharply criticized GM for what he said were a series of poor management decisions. He also called for the ouster of GM Chief Executive Rick Wagoner.

In the column, titled "An American Idle," he also described the Pontiac G6 as a "sales flop." His conclusion: "When ballclubs have losing records, players and coaches and managers get their walking papers. At GM, it's time to sweep the dugout." As GM has struggled to stop losing market share in the U.S., executives there have stepped up the volume of their complaints about negative press. Leading that offensive is Vice Chairman Robert Lutz, who chastised reporters at the New York Auto Show last month for what he said were unfair criticisms of American cars. He also has taken the media to task on his Web log, saying that reporters had taken out of context remarks he made about GM's troubled Pontiac and Buick brands.
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Am I wrong or does this sound like desperation?
Depending on restrictions, this might be a cheap way to lease a car for 11 months or so.

GM offers a "Freedom Lease"

Customers who lease the Buick LaCrosse, Chevy Cobalt and Pontiac G6 from April 5 to June 30 in California, Atlanta, Baltimore, Washington and Providence, R.I., will be able to return them within the first 12,000 miles, according to the Detroit News and Autodollars.com, an auto-incentive website. The offer is only available to customers who make a nonrefundable $1,500 down payment and meet certain credit requirements, according to the reports.
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Deutsche Bank got into the GM act today (fat chance of them getting any GM business) and cut GM to sell with an overly generous price target cut of $24. The correct target is ZERO which is where GM and Ford are both ultimately headed.

Deutsche Bank analyst Rod Lache put out a sell rating on GM downgrading GM from hold, and slashed his price target to $24 from $28. In addition, Lache initiated coverage of the world's biggest automaker's fixed income securities with a sell rating.

Mish Comment:
This downgrade caused more than a bit off tizzy for GM and Ford bonds and most assuredly contributed to today's overall market sell off. The DOW, S&P500, and the Naz all fell about 1% today. GM was off 3.4%. GM's bonds are a far bigger concern than GM's stock and a downgrade by the rating agencies of GM's debt to junk will literally flood the Junk Bond Markets. That Mish readers, is the real news in today's headlines.
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Analyst expects GM to be cut to 'junk' in 3 to 6 months.
'We believe that the deterioration that we are likely to see in GM profitability and its balance sheet will be alarming to both equity and bond investors.'
Rod Lache, Deutsche Bank

Mish Comment:
Exactly!
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Health and Pension Costs are spiraling out of control at GM.

GM expects to spend $5.6 billion this year to care for 1.1 million active and retired employees and their dependents. Last year, health-care spending amounted to $1,525 for every vehicle GM produced in the U.S. Chief Executive Rick Wagoner, who personally took charge of North American operations this week, blames those costs for much of GM's profit woes.

Unfortunately for GM, current employees and their families account for only about 31% of the total health bill. Retirees, who are less easy to reach with the live-healthy message, make up the remainder.

Enquiring Mish readers might be asking about working conditions at GM. Let's take a look:

"I don't smoke and I don't want to stand on the line next to somebody that smokes all day long," says Rick Austin, a 10-year veteran who works on the radiator line. "I worked by a girl who smoked about 10 packs of cigarettes a day, just in 10 hours. She smoked a pack an hour. I don't want to work like that for 30 years."

Mish can't fathom standing next to someone smoking 10 packs a day while assembling cars. Can you? Why should this be allowed? It nothing else, this would seem to be a safety violation of some kind.
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Over in the UK we see that the MG Rover is on the brink of collapse.

MG Rover was on the brink of collapse last night after it said it would be forced out of business "very quickly" without an emergency £100m government loan - raising the spectre of Britain's last volume carmaker closing its gates on the eve of next month's general election. As the chances of a tie-up with China's Shanghai Automotive Industry Corp receded, production lines stopped yesterday after key suppliers demanded money the company does not have to continue component deliveries.

How long will it be before GM has no bidders?
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Let's summarize what we know about GM

1) Its market share is falling
2) Its expenses are excessive
3) Its cars are non-competitive in a rising gasoline environment
4) It is slow to react to changes
5) Its pension plan is under funded
6) Its union rules are horrendous
7) Its working conditions reek
8) Its debt is massive
9) A downgrade of that debt is coming and it will increase GM's borrowing costs
10) GM is quickly headed for bankruptcy unless it can figure out how to unload all its pension debt and employee benefits. With wage differentials vs. cars from Korea and upcoming cars from China, GM is ultimately doomed anyway. The only open question is how long it takes.

GM's debt is ultimately worthless. Those chasing far out yields in GM's bonds are going to get hammered. The recent 27% drop is just a down payment.

Mish