Ford Spills Some Beans on General Motors Earnings
Mark Gilbert
April 22 (Bloomberg) -- You would think a company with a market value of $14.5 billion, a stock that's down 35 percent this year and bondholder debts of $114 billion would find it prudent to keep investors as informed as possible about its prospects. Not, it seems, when the company is General Motors Corp.
John Devine, chief financial officer of General Motors, told listeners on an April 19 conference call he wasn't ``trying to be cute'' by pleading the Fifth Amendment on questions about the 2005 earnings outlook. No matter; the following day, Ford Motor Co. said enough about the current quarter for bondholders and shareholders to divine for themselves that junk credit ratings are still likely for both automakers by the end of the year.
Instead of making 38 cents a share, the average forecast of analysts surveyed by Thomson Financial, Ford said the best it can hope for in second-quarter earnings is to break even, and that it might lose as much as 15 cents a share, even with the cushion of its financial-services unit. Losses at the car business are likely to be ``substantial,'' CFO Donat Leclair said April 20.
Uh-oh. That extinguishes any hopes (prayers?) that General Motors' decision to abandon this year's earnings prediction was a precursor to revising its estimate higher. Ford's confession about how poor the auto business is tells us General Motors won't deliver the $1 to $2 per share promised on March 16, never mind the $4 to $5 anticipated at the start of the year.
Guidance Withdrawn
GM's first-quarter loss was $1.95 a share as its U.S. market share slumped to 25.6 percent from 26.8 percent a year earlier. ``Given the uncertainty affecting key elements of our financial forecast, such as resolution of the health-care cost crisis, GM has determined that it will not provide earnings guidance for the 2005 calendar year at this time,'' the company said. Employee medical bills are expected to cost $5.6 billion this year.
The analysts who posed questions during the accompanying conference call sounded skeptical. Surely the previous earnings guidance wasn't predicated on ``groundbreaking concessions'' from labor unions on health-care costs, said Darren Kimball at Lehman Brothers Holdings Inc., who rates the company ``performer'' (whatever that's supposed to mean).
Unfortunately, it looks like management did expect its tales of financial woe to persuade the unions to back down -- a strategy that doesn't appear to be working.
All Too Predictable?
Stephen Girsky at Morgan Stanley couldn't see what might make health-care costs uncertain. ``What's not predictable?'' he asked. He put out a research note the following day titled ``The Issues Are More Than Just Healthcare'' (which is a much easier concept than his stock rating of ``equalweight/cautious'').
The best reaction on the call, though, came from Ronald Tadross at Bank of America Corp., who rates General Motors a ``sell'' (at last, an analyst rating not written in hieroglyphs). ``I keep going back to the idea that there's got to be a bigger fix here in terms of the business,'' he told Devine. ``It's obvious to most people that the math doesn't seem to work.''
``We probably have a different view than you,'' Devine replied. (Rick Wagoner, chief executive of General Motors, didn't make it on to the call, presumably too busy fixing all those things that need fixing in the North American auto business.)
Tadross is correct. The math doesn't seem to work. Negative cash flow in the first quarter was $3 billion at General Motors, even without including $1.7 billion for dismantling the alliance with Fiat SpA and slimming GM's European workforce. So cash generation will need to be something special to achieve the March guidance of (only) a $2 billion cash outflow for the year.
Debt Abstinence
General Motors is shying away from testing the willingness of bond investors to lend it more money. The company hasn't sold unsecured debt for 135 days, its longest period of abstinence from its borrowing habit since at least 1999, Bloomberg calculations show.
Ford's first-quarter results beat expectations, with earnings of 60 cents a share outpacing the 39 cents estimated by analysts. That spoofed bonds of both Ford and General Motors into a rally, driving the yield on Ford's 7 percent 2013 notes down by about 50 basis points to 8.69 percent and on the General Motors 6.875 percent notes due 2011 to 9.82 percent from 10.60 percent.
``Ford likely has longer as an investment-grade credit than General Motors, but potentially only months,'' wrote Matthew Winch, a credit analyst for WestLB AG in London, in a research note following the results. ``We expect a cut for Ford to junk by October 2005.''
The recovery in debt prices looks unsustainable. Ford's earnings in the first three months are likely to be as good as it gets this year. General Motors' newfound coyness about its 2005 prospects will be unmasked when it has to publish its damage report for the second quarter. Neither can recover enough ground this year to avoid their credit ratings being cut to junk.
Last Updated: April 21, 2005 19:03 EDT
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