GM Previews Brutal Year
Updated from 10:01 a.m. EST
General Motors
(GM) - Get Report
stunned the stock market Wednesday with an ominous profit warning that cut its 2005 earnings outlook by more than half.
The No. 1 automaker expects to lose $1.50 a share in the first quarter and earn just $1 to $2 a share for all of 2005. The company had previously predicted a breakeven first quarter and earnings of $4 to $5 a share for 2005.
The stock was recently down $4.35, or 12.9%, to $29.37, falling through its 52-week low of $33.69. Spreads on GM bonds also widened over Treasuries as investors worried about a possible credit downgrade.
GM's $50 billion of corporate debt is currently rated at BBB- at Standard & Poor's, the agency's lowest investment grade level. Its debt is the second-largest component of the Lehman Brothers corporate bond index behind
Ford
.
Wednesday's guidance reflects "lower North American sales and production volumes, a tougher pricing environment, and a more car-based sales mix. At the same time, GM's other automotive regions and GMAC are all on track to meet or beat their 2005 net income targets."
GM's previous first-quarter earnings guidance was based on North American vehicle production of 1.25 million. Since then, production schedules have been reduced by about 70,000 vehicles and pricing has become more competitive in North America.
GM also expects negative operating cash flow in 2005 of approximately $2 billion before charges related to its settlement with Fiat and the restructuring of its European division. It had previously targeted positive cash flow of $2 billion. The revision is primarily attributable to lower volume and decreased net income at GM North America.
For the last three years, GM has derived the lion's share of its profit from its financing arm, General Motors Acceptance Corp. In its release Wednesday, the company said GMAC "is on target to exceed expectations" despite higher interest rates and wider spreads.
"Much of GMAC's success stems from its ability to diversify its funding sources," GM said in a release. "We're confident that GMAC can continue to sustain strong levels of profitability."
GM has reportedly weighed a spinoff of GMAC in recent months as a way of shielding the parent's corporate credit rating from the possibility of a ratings-agency downgrade.