GM's Shares Hit by Analyst Downgrades

Several analysts are forecasting that GM shares will sink below a dollar on weak sales, cash burn, and looming debt

By David Kiley

General Motors' (GM) shareholders probably have a gloomier outlook than the company itself.

Shares of the struggling automaker sank 23% on Monday, Nov. 10 after the company admitted on Friday, Nov. 7 that it may hit the danger point in its cash reserves (BusinessWeek.com, 11/7/08) by the New Year. Some Wall Street analysts say that GM shares may not recover for years even if the U.S. government comes to its rescue. That's because GM will owe so much additional debt that the burden will hang over its share price for a generation.

GM closed at 3.36, a 62-year-low for the automaker. Ford (F), widely considered to be in somewhat better shape to weather a recession next year, but far from being out of the woods, closed down 4.5%, to 1.93.

Looking at the Lame-Duck Session

Democratic leaders of Congress—House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid—wrote to President George W. Bush and Treasury Secretary Henry Paulson on Nov. 7 asking that they revisit their decision to not include the automakers as beneficiaries of the $700 billion bailout of financial firms last month.

But on Nov. 10, Capitol Hill sources said the White House seemed "dug in" on the idea that the bill can't be rightfully read to include auto companies. "The push now is going to be to pass an amendment to the bill that specifically benefits the automakers," said one congressional staffer with knowledge of the negotiations. Congress meets next week in a lame-duck session during which such an amendment could be voted on. The other possibility is attaching help to the automakers to an economic stimulus bill that the Democratic leadership is drafting for the session.

President-elect Barack Obama has made it clear that he wants the automakers helped one way or another. That may move enough reluctant Republicans to vote for it next week. "There are some Republicans who opposed helping the automakers a couple of months ago, but now seem more willing to go in Obama's direction," said the legislative staffer.

A Target Price of Zero

Wall Street is painting a dim picture of GM's future with or without government help. Barclays (BCS) now targets GM shares at 1, while Deutsche Bank (DB) slashed its target price to zero. "While further government assistance would decrease the likelihood of a GM bankruptcy, we believe any government assistance would likely significantly dilute GM's equity," analysts at Barclays Capital said. Deutsche Bank's Rod Lache wrote in a note to investors: "Without government assistance, we believe that GM's collapse would be inevitable, and that it would precipitate systemic risk that would be difficult to overcome for automakers, suppliers, retailers, and sectors of the U.S. economy." Lache has a target of zero on GM.

Automakers are looking for a minimum of $25 billion in immediate loans. Part of the deliberations going on between GM and the Michigan congressional caucus has to do with what conditions the automaker may be willing to agree to in exchange for help—from executive compensation limits, shareholder dividends, and job protections.

GM said on Nov. 10 it would cut 1,900 factory jobs on top of the 3,600 cuts announced on Nov. 7.

GM on Nov. 7 posted a net loss of $2.5 billion in the third quarter, and said it ran through $6.9 billion in cash, leaving it with only a thin cushion between its current reserves and the minimum amount of cash needed to fund day-to-day operations.