This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

GM Lending Arm Pumped Up

General Motors' (GM - Get Report) lending business is the only thing keeping America's largest automaker from falling into the abyss. So it's unnerving to see this finance arm, called GMAC, report low-quality first-quarter earnings.

In the first quarter, GMAC -- short for General Motors Acceptance Corp. -- earned $729 million, while GM's auto business lost $1.83 billion. On a consolidated basis, then, GM lost $1.1 billion, or $1.95 per share.

The company had warned investors that the loss was coming, but not until mid-March. Up to that time, it was telling investors to expect earnings of $4-$5 per share in 2005. Now the company says it expects to make just $1-$2 per share.

The reduction in earnings guidance, along with fears that rating agencies will downgrade GM's debt to junk and news that GM's unions aren't likely to bow to cost-cutting measures, has crushed GM's stock. It closed down a dime at $26.09 Tuesday. That's nearly 50% below the stock's 52-week high.

Detox first took a bearish stance on GM three years ago, greeting with skepticism the company's prediction back then that it would make $10 per share in 2005.

Sticky Wicket

To assess just how dangerous a slowdown at GMAC would be, one must understand the gamble that GM made after the 9/11 attacks. Automakers have a notoriously sticky cost base, which means any slowdown in sales can tip a carmaker into a loss very easily, as can be seen with the recent reductions in earnings forecasts.

GM feared the terrorist attacks would reduce demand for car purchases, so it had GMAC unleash a tidal wave of cheap credit to motivate people to buy cars. Car sales did respond, and GMAC also made money from its large mortgage operations during the easy-money boom that took over the entire U.S. financial sector.

However, this strategy always threatened to come undone if interest rates rose or if demand for GM's products dropped off, due to saturation or competition. Surely enough, these factors are hurting GM now, forcing the company's managers to try a deep restructuring.

However, a full-blown crisis could occur if GMAC started to show real signs of stress. Clearly, anyone looking at GM's stock simply has to watch GMAC for any signs of weakness. And the unit's first-quarter results, as well as management comments, do raise some uncomfortable questions. The big fear is that GMAC used hard-to-repeat gains to boost earnings at its mortgage operations.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,678.70 +6.10 0.03%
S&P 500 2,057.09 +5.27 0.26%
NASDAQ 4,771.7630 +13.8840 0.29%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs