| BUSINESSWEEK ONLINE : FEBRUARY 1, 1999 ISSUE | ||||||||
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| COVER STORY
Is GM's Hot Stock Heading for a Stall? Most analysts expect its earnings to keep climbing -- but not its shares General Motors Corp. (GM) (GM) has produced several positive earnings surprises recently, and its latest quarter was particularly upbeat. Thanks to surging North American vehicle sales and successful cost-cutting efforts, on Jan. 19 the company announced fourth-quarter earnings that far exceeded analysts' estimates. The consensus guess was for GM to earn $2.65 a share on earnings from continuing operations. But excluding special items, it reported a record $3.25 a share, as fourth-quarter earnings from operations rose 55%, to $2.19 billion. Revenues in the quarter rose to $46.4 billion, up from $42.9 billion in last year. Clearly, management at the No. 1 carmaker is doing a lot right. In the two days since GM surprised everyone, analysts have been busy ratcheting up their 1999 earnings estimates for the company. The consensus prediction for '99 climbed from $8.23 on Jan. 19 to $8.47 on Jan. 21, according to First Call Corp., which tracks such things. But while analysts might love the earnings report, they haven't raised their overall ratings on the stock. First Call says the average recommendation has remained at 2.1 (on a scale where 1 is a strong buy and 5 is a sell) since mid-December. This is GM's highest average rating since opinion on it hit a low of 2.6 in August, when the company was in the midst of a punishing strike. This paradox -- analysts raising earnings estimates, but not recommendations -- shows that Wall Street still has reservations about the prospects for GM and the auto industry as a whole. "I'm constantly thinking about whether to raise my recommendation," says Efraim Levy, an analyst with Standard & Poor's equity research group, who maintained his neutral rating on the stock while hiking his 1999 full-year earnings estimate from $7.50 to an eye-opening $9.40 a share. CYCLICAL SLIDE? Although the strong fourth-quarter numbers markedly improved his outlook for GM and the auto industry, "I have to be careful here," Levy says. The auto industry is notoriously cyclical, and competitive pressures are increasing, he says. Plus, GM's stock has already moved up nearly 25% this year alone to close on Jan. 21 at 89 15/16, nearly double its 52-week low of 47 last October. "It's a cyclical company, so when things start tailing off, the stock will react violently to the downside," he says. However, based on the strong fourth-quarter revenues, he doesn't expect sales to start slowing as soon as he once did. Some analysts think GM won't be able to maintain such strong earnings results into 1999. The fourth quarter benefited from a ramp up in production to rebuild inventory after the third quarter's strike, points out Merrill Lynch analyst Nicholas Lobaccaro, who had the highest fourth-quarter earnings estimate on the Street. Yet his 1999 estimate remains well below the $8.47 consensus (although he raised it from $7 to $7.50 on Jan. 21). He predicts that GM will post strong earnings for the first quarter (again, due to inventory building). But after that, slower inventory building, lower sales for the industry, and a need for higher incentives to build market share will crimp earnings in the last nine months of the year, Lobaccaro thinks. And thanks to Brazil's recent currency devaluation, Latin America could spell problems for GM's international operations, he believes. Still, Wall Street has been warning for years that auto industry sales would slow -- and they haven't yet. The industry sold 15.6 million units in 1998, when many analysts believed sales would top out at 15 million. Auto stocks were also dented in late summer and early fall because of fears of a global slowdown that never fully materialized. Value portfolio managers, who saw bargains in the group, have made money by ignoring Wall Street's concerns. STRONGER NOW. "The economy is still flashing a green light for auto sales," says David Sowerby, a portfolio manager with Loomis, Sayles & Co. in Detroit who started buying GM last July and added to the position as recently as a month ago. Costs of financing are low, consumer confidence is strong, personal incomes are growing, and gas prices are low, he notes. Furthermore, when the economy does finally slow, Sowerby thinks the auto industry will hold up better than it has in the past, because inflation and interest rates are so low. In a normal recession, car sales drop 25% to 30%, he says. But next time, he thinks sales will drop only 10%. Although GM's stock has risen dramatically, Sowerby thinks it has room to climb. It's still trading at a lower forward p-e -- 11 -- than Ford (F) (F) and DaimlerChrysler (DCX). Plus, GM has more room than the other two to improve earnings by cutting costs and spicing up its product lineup, he says. "Wall Street still needs to warm up perhaps a little bit more to the auto industry and to Detroit," he adds. "And that means there is still more potential for the stock to move higher. Hopefully this is just the start of good things to come." By Amey Stone in New York _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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