Auto stocks plunge on worries

October 9, 2008 4:13:53 PM PDT
Shares of General Motors Corp. lost nearly one-third of their value Thursday, plunging to their lowest level in more than 58 years after Standard & Poor's said the automaker's credit could fall further into junk status due to the "rapidly weakening state" of the global automotive market. GM shares plummeted $2.15, or 31.1 percent, to close at $4.76 after falling as low as $4.65. That low marked the automaker's lowest trade since March 15, 1950, according to the Center for Research in Security Prices at the University of Chicago. At that time, the Korean War was three months away from beginning, and gasoline cost 27 cents a gallon.

Thursday marked the sixth straight day of losses for GM. The automaker's shares are down 50 percent from their close of $9.45 at the end of last month.

Brett Hoselton, an analyst who follows GM stock for KeyBanc Capital Markets, said a number of factors could be behind Thursday's drop, including the decline in banking stocks.

"Obviously, GM and Ford, they're closely tied to automotive financing," Hoselton said. "If you can't finance cars, you can't sell cars."

In addition, the three-week ban on short selling some stocks - including GM's - expired late Wednesday. Short selling involves borrowing a company's shares, selling them, and then buying them back when the stock falls and returning them to the lender. The practice allows investors to profit from the decline in a stock's value.

Dave Healy, analyst for Burnham Securities, said it's possible that the expiration of the short-sell ban hurt Ford and GM, though there is no way to know for sure.

"Both stocks have been favorites of the short-sellers" he said. "These are volatile stocks. They go down 10 percent when the market goes down 5 percent, and vice versa."

Still, the automobile industry has been bombarded by a spate of gloomy news. In the closing minutes of trading Thursday, Standard & Poor's Rating Services placed GM and its finance arm, GMAC, on "CreditWatch Negative," meaning a downgrade of its "B-" long-term corporate credit ratings could be forthcoming.

S&P did the same to Ford Motor Co., helping send the Dearborn, Mich., company's stock down 58 cents, or 21.8 percent, Thursday to close at $2.08. It had fallen as low as $2.03 earlier in the session, it's lowest price since June 1, 1983.

Analysts have voiced concerns that the ongoing slump in U.S.

vehicle sales could last longer than they previously expected and could spread to other parts of the world, particularly Europe.

GM said Thursday that sales of its Opel and Vauxhall brands dropped more than 6 percent in Europe during the first nine months of the year - a sign that the downturn is hitting economies globally and taking worldwide auto sales down with it.

S&P also cited capital market conditions "that will remain a serious challenge for the foreseeable future."

Healy called S&P's warning "shooting at the life boats." But given their perilous credit situation, he added the best step for the automakers is to conserve liquidity and focus on their most important model changes.

"They're limited on what they can borrow anyway," he said. "They have some liquidity. They have some contractual borrowing power from the banks, which doesn't depend on ratings. They also have some assets they can sell."

The company announced a plan in July that calls for cutting $10 billion in costs and raising another $5 billion through asset sales and borrowing through 2009.

GM had $21 billion in cash and $5 billion available through credit lines at the end of June for total liquidity of $26 billion but has been burning through cash at a pace of more than $1 billion a month.

Fitch ratings analyst Mark Oline has projected that GM could reach the minimum amount of cash required to run the business, $11 billion to $14 billion, within the next year.

Shares of GM have withered since peaking near $94 in 1999 and 2000, and they're down 89 percent from their 52-week high of $43.20 set a year ago Sunday.

Less obvious has been the precipitous drop in GM's market capitalization, which accounts for the value of all of the company's outstanding shares and represents the price at which a company could hypothetically be bought.

At Thursday's close, GM's market capitalization was $2.7 billion, down 81 percent from $14.1 billion at the start of the year. That's smaller than some of its parts suppliers, like Magna International Inc., which has a market cap of $4.1 billion. Toyota Motor Corp., GM's biggest global rival, dwarfs the Detroit automaker with a market cap of about $105 billion.

GM is also now the smallest of the 30 stocks that make up the Dow Jones industrial average, and it no longer meets one of the criteria - $4 billion or more in market cap - to join the Standard & Poor's 500 Index. S&P spokesman Dave Guarino declined to say if GM was in danger of being removed from the index because such announcements often move a stock.

Another possibility: With such a small market price, and assets worth far more, the company is vulnerable to a takeover, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

"Absolutely," he said when asked about the possibility. "Except for one thing: lots of debt. And most people are very reluctant. It's not just the current equity, it's the debt that you have to absorb at the same time."

At the end of June, GM reported more than $32 billion in long-term debt, and since then it has exercised $3.5 billion of a $4.5 billion line of credit.

Cole said GM's engine and transmission operations alone are probably worth $10 billion to $20 billion, far above its market capitalization.

KeyBanc's Hoselton was skeptical of the prospect of a GM takeover.

"While the market cap may be small, the breadth of the operation is overwhelming," Hoselton said. "It'd be very difficult from a strategic standpoint for virtually anybody to get around that company."


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