Markets & Finance

Merrill Changes Gears on U.S. Automakers


Analyst John Murphy boosted the firm's rating on General Motors to buy -- but lowered Ford to sell

Is General Motors (GM) at that happy stage where the Street sees a recovery? While a sudden U-turn in the company's fortunes is unlikely, Merrill Lynch upgraded the troubled automaker's shares to buy from sell on Feb. 13, while relegating GM's rival Ford Motor Co. (F) to sell from neutral.

To be sure, both companies face similar challenges: they're struggling to pay their employees' health-care costs as sales languish. Rivals overseas like Japan's Toyota Motor (TM) have been tough competition.

But Merrill Lynch pointed out that GM has around $31 billion of liquidity, or assets that can be quickly turned into cash, while Ford has around $46 billion. Meanwhile GM, in contrast with Ford, has the possibility of tapping relatively receptive markets for even more cash. And GM's pension plan is now $17 billion over-funded, giving it the largest surplus its ever had.

"We increasingly believe that GM will leverage its liquidity and legacy assets, specifically in its pension, to affect positive change," Merrill Lynch analyst John Murphy said in a research note.

"We view GM's equity as more attractive than Ford's as the benefit of any concessions on retiree healthcare would be much greater for GM," Murphy said. "GM is at a much better point in its product cycle and has a much richer surplus in its U.S. pension, both of which should lend near-term support for the stock."

Investors bid up GM 2.5% to $36.59 on the New York Stock Exchange on Feb. 13, while they sold Ford 2.3% to $8.45 per share.

Merrill Lynch isn't the only firm to wax more optimistic on automakers lately, either. On Feb. 9 Deutsche Bank's Rod Lache upgraded both Ford and GM to buy from hold, noting higher odds that some in the industry could hammer out solutions to their health care costs this year. Lache had noted that The United Steelworkers Union recently offered Goodyear Tire & Rubber Co. (GT) a deal that effectively got it out of the retiree healthcare insurance business (see BusinessWeek.com, 2/9/07, "Health Care Relief for Ford and GM?").

(Merrill Lynch and Deutsche Bank do business with companies covered in their research reports.)


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