Cutback plans boost GM stock

But analysts question firm’s long-term prospects

David Shepardson and Christine Tierney / The Detroit News

Shares of General Motors Corp. soared Wednesday, signaling that the automaker’s plans to raise $15 billion by the end of 2009 reassured investors and put their fears of bankruptcy to rest.

The Detroit automaker’s stock jumped $1.64 to $11.48 — gaining back nearly all the ground it lost after Merrill Lynch said on July 2 that a bankruptcy filing by GM "was not impossible." The comments in the Merrill report had sent GM’s shares to its first close below $10 in more than 50 years.

GM announced plans Tuesday to cut at least 20 percent of its salaried work force costs, suspend its dividend for the first time since 1922, eliminate 65 and older salaried retiree health care coverage and reduce truck production by another 150,000 units. It said it also would raise cash through measures including asset sales.

Company officials said they don’t expect to announce what assets are up for sale or what plants will be affected by the truck production cuts until after Labor Day.

They have retained several outside advisers to help shed some non-core assets in an effort to raise up to $4 billion.

GM said last month that previously announced reductions in truck output would affect factories that supply four truck plants slated for closure. GM will detail its plans to the United Auto Workers union.

UAW President Ron Gettelfinger said Wednesday that he didn’t think the union would make any more concessions to GM. "We have done a lot. No, there’s nothing more we can do," Gettelfinger said in an interview with Paul W. Smith on WJR Radio.

But his comments and long-term concerns didn’t dampen the rally in GM shares.

The broader markets were up about 2.5 percent Wednesday and GM also benefited from a second straight day of sharp declines in oil prices.

Other auto stocks rose, too. Ford Motor Co. saw its battered shares jump 18.1 percent to $5.49, while auto suppliers stocks also gained. American Axle & Manufacturing Holdings Inc. was up 12.8 percent; Lear Corp. jumped 7.7 percent; and Dana Corp. was up 7.6 percent.

One factor that boosted GM’s stock was the fact that the automaker didn’t take any actions to dilute the stock’s value — namely a new offering.

Analysts wary of GM’s future

But analysts underscored in reports that concerns about GM’s long-term prospects remain and point out some of the big bills coming due in 2010.

GM pushed back $1.7 billion in payments owed in 2008 and 2009 to a fund that will cover health care for UAW retirees. GM will make the payments in 2010, when the UAW assumes responsibility for the fund. Gettelfinger didn’t discuss that decision Wednesday.

That means GM will pay the $1.7 billion, plus accrued interest of 9 percent, along with $7 billion already scheduled for 2010. They will be the first payments as part of a deal to give the UAW $35 billion in cash and stock to assume $47 billion in retiree health care liabilities.

Merrill Lynch analyst John Murphy, who sparked the July 2 sell-off in shares by saying a GM bankruptcy could not be ruled out, expects the automaker’s stock to head toward $7 a share.

In a report issued Wednesday, he painted a gloomy picture: In addition to the risk that GM could run short of cash, the automaker is caught in a severe cyclical downturn and faces many other risks, ranging from raw materials price increases to GM’s exposure to its former parts unit Delphi Corp., which has struggled to emerge from bankruptcy. GM has already taken a $7.5 billion charge related to Delphi.

The automaker has made progress in cutting costs and streamlining its lineup, but concerns about liquidity are requiring GM to turn to "severe austerity actions" that could reduce future earnings power, Murphy wrote. "Some refer to the confluence of negative factors as the perfect storm or the 100-year flood; whatever term you deem appropriate, this is almost undoubtedly turning into a potential disaster for existing shareholders."

GM may get boost in cash in 2010

Due to the restructuring actions, Lehman Brothers auto analyst Brian Johnson said he expects GM to have $11.3 billion in cash in 2010, "up $10.4 billion from our previous estimate and in the $10-12 billion range we believe to be GM’s working cash needs."

GM is burning through $1 billion or more a month, analysts say, and will announce a significant second-quarter loss on top of a $3.3 billion first-quarter loss.

Deutsche Bank analyst Rod Lache said the measures GM outlined allayed mounting fears of a cash crunch at the U.S. automaker, but did little to reassure investors about long-term prospects. "While we are somewhat more comfortable with questions about short-term survival, we continue to question its long-term earning power and competitiveness," he said.

Still, the moves whittled at GM’s cost structure. Lache said they would cut GM’s fixed costs by between $6 billion and $7 billion, to around $26 billion to $27 billion by 2010, from $33 billion last year.

GM Vice Chairman Bob Lutz posted a note on a company blog explaining the cuts were "hard calls to make. They weren’t made lightly, they weren’t pleasant decisions to reach."

"I’m not going to sit here and say we have done everything right and made nothing but good decisions," Lutz said. But he said since the company announced its turnaround plan in 2005 "we’ve had a firm sound plan and have delivered on it."

In a note issued Wednesday, Goldman Sachs analyst Patrick Archambault retained a sell rating on GM’s stock. He attributed the stock’s rise to relief that the cash-raising measures did not entail the issuance of new shares that would dilute current investors’ holdings and weigh on the share price.

He also said the plan’s assumption that the U.S. auto market will remain weak next year, with total industry sales not expected to exceed 14 million cars and light trucks, was conservative. But he said several factors could undercut the plan’s objectives, such as high raw materials costs, any deterioration in vehicle pricing or weakness in GM’s overseas operations.