Market Features

Return to Article

GM Extends No-Interest Loans as Big Three Sales Surge

Mary Haffenberg

Auto giant General Motors(GM - Cramer's Take - Stockpickr) extended its interest-free car loans Wednesday, turning up the heat on its competitors and potentially raising the economy's temperature. The incentives came as the Big Three carmakers all reported robust gains in vehicle sales last month and GM raised its earnings guidance.

GM's decision to extend the packages, which were instituted shortly after the Sept. 11 terrorist attacks and have goosed auto sales in the intervening year, has traditionally prompted Ford(F - Cramer's Take - Stockpickr) and Chrysler to do the same.

"Ford and Chrysler will have to do something to remain competitive," said Richard Hilgert, an analyst with Fahnestock & Co.

Juiced Up

Zero-percent financing has also been a boon to consumer spending, a big part of whatever economic recovery has occurred. Durable goods orders shot up more than 8% in July, largely on the strength of car and truck sales.

GM said it would also offer a choice of cash rebates or refinancing on some new models. The financing deals exclude Saturn, Saab and Hummer lines.

Domenic Martilotti, an analyst at Bear Stearns, said Ford and Chrysler will come close to zero-percent financing, "But I'm not sure if they'll go to zero-percent," he said.

GM's announcement actually marks a slight ratcheting back of its programs. According to David Healy, an auto industry analyst with Burnham Securities, after Sept. 11 GM offered interest-free financing for 60 months. The new program, which begins Oct. 31, offers zero-percent financing for 36 months, 2.9% financing for 48 months and 3.9% financing for 60 months.

Profit Margin

Analysts believe the incentives have been profitable overall for GM. Essentially, the auto maker takes over the financing from its lending unit, GMAC, and reimburses it so GMAC doesn't incur a loss. GM considers the program a marketing cost.

"They're better off doing it than not," Healy said.

And though the new program is expected to keep car shoppers coming to dealers' lots, analysts aren't banking on vehicle sales being able to maintain an 18 million annual sales pace.

"Eighteen million is just not sustainable. But 16 million is still healthy and that it can sustain," Hilgert said.

Wednesday afternoon Ford announced that its sales in August were up 12.2% from the same month in 2001. Car sales rose 16.1% and light truck sales were up 10.1%.

Chrysler said sales of its cars and trucks rose 28.1% in August compared with the same month a year ago. Its car sales jumped 29.4% and light truck sales rose 27.8%. GM is expected to come out with its August sales figures later Wednesday.

GM said its August vehicle sales rose 18.2% for that same time period, with car sales rising 7.9% and trucks sales increasing 27.4%.

GM also hiked its earnings targets, raising its third quarter 2002 earnings a share to $1 from 90 cents and full-year earnings a share to $6.50 from $6, excluding losses from its Hughes Electronics(GMH - Cramer's Take - Stockpickr).

Analysts polled by FirstCall are forecasting third-quarter earnings of 88 cents a share and full 2002 earnings of $5.99 a share for GM.