With zero earnings visibility coming out of Detroit these days, analysts are all over the map when it comes to predicting first-quarter results from the two largest U.S. automakers.
is expected to pare its losses, thanks to better pricing and cost cuts. Analysts anticipate that
will post a profit, albeit a lower one. Sales and market share continued to decline for both companies as they grappled with lower demand for gas-guzzling sport utility vehicles and competition from Japan.
One thing remains certain for these automakers: As long as labor crises loom and oil prices remain above the $70-a-barrel mark, the stock market's bleak assessment of their prospects isn't likely to improve anytime soon.
GM, scheduled to report Thursday before the market opens, is expected to post a loss of 44 cents a share for the quarter, according to Thomson First Call's average analyst forecast. That would mark an improvement over its loss of $1.49 a share recorded in the same quarter last year. The company's sales are expected to have dropped to $39.4 billion from $45.8 billion.
The most optimistic assessment on Wall Street holds that GM could have earned 6 cents a share, while the most pessimistic forecast calls for a loss of $1.33 a share. The large divergence reflects overlying uncertainties about the auto industry, along with the absence of any guidance from the automaker itself. GM halted its practice of making earnings forecasts last year when its sales and earnings went into freefall, rendering its predictions way off the mark.
The world's largest automaker posted a loss of $10.6 billion in 2005 after its chairman and chief executive, Richard Wagoner, had predicted at the beginning of the year that it would earn $4 to $5 a share. All three major agencies lowered its credit rating deep into junk territory over the course of the year, and the company came under scrutiny from regulators for its accounting practices.
GM's market share continued to disappoint in the first quarter, with sales to retail customers dropping 9% from last year. But Rod Lache, an analyst with Deutsche Bank, said in a research note that earnings could outperform expectations for the period. He said GM's profit could be boosted by changes to the company's pricing strategy, an accounting benefit of 23 cents a share related to restructuring charges taken in the fourth quarter, and improvements to its product mix. Specifically, Lache views the rollout of its new SUV line, the GMT-900, as a winner.
"GM has experienced a 3% to 4% increase in average retail transaction prices with about half being due to
the new SUV model," wrote Lache.
While predicting a better-than-expected quarter, Lache cautions investors against concluding that a positive performance can be sustained.
"Our sense is that GM will have to make adjustments to its pricing strategy, or it will have to make substantial cuts to production in the months ahead," says Lache. "Either way, our view is that first-quarter results aren't indicative of the company's true earnings power."
GM's first-quarter results will be viewed against the backdrop of a potential crisis looming at
, the company's largest auto-parts supplier and former subsidiary. In its ongoing bankruptcy proceedings, Delphi recently filed motions in court to
void its labor agreements, prompting a showdown with the United Auto Workers that could result in a strike. Not only could a strike decimate GM's cash position, but it could also have major ramifications for the automaker in its own negotiations with the UAW to lower its burgeoning labor costs.
GM has said it will be liable for anywhere from $5.5 billion to $12 billion in costs related to Delphi's bankruptcy. Lache estimates the bankruptcy will cost GM at least $10 billion. GM recently struck a deal to sell off a 51% stake in its profitable finance unit, GMAC, in return for $14 billion in cash over the next three years, which will help it maintain liquidity.
Most observers say a strike at Delphi is unlikely, but the increased possibility of such an event is weighing on GM shares. The stock was recently trading up a penny to $20.59.
For Ford, analysts project earnings of 25 cents a share, down from last year's 39 cents a share. Wall Street expects sales of $39.7 billion, down from $45.2 billion a year ago.
While Ford's profitability is expected to be salvaged by its finance unit, Calyon Securities analyst Joseph Amaturo wrote in a research note that he expects the No. 2 U.S. automaker to report "meaningful automotive losses" for the quarter.
"We believe the company's North American automotive operation will report a material pretax loss as a result of lower production volumes coupled with lower transaction prices and higher incentives," Amaturo wrote.
He recommends that investors sell Ford prior to its earnings release before Friday's opening bell, because its results will likely highlight the difficulties the company faces.
Burnham Securities analyst David Healy predicts that Ford will fall short of Wall Street's consensus estimate and come close to breaking even.
"Our worksheet suggests that Ford's pretax operating loss in North America in the first quarter will roughly reverse the year-earlier profit of $663 million," wrote Healy in a recent research note. "Chief culprit in this reversal is product mix, best exemplified by the first quarter's year-to-year drop of 25% in sales of the Ford Explorer SUV."
He sees Ford's profitability declining in 2006 and 2007 as rising interest rates squeeze earnings from Ford credit. The company's "Way Forward Plan" is
designed to restore profitability to its automotive business in 2008.
Both companies have been struggling to compete with foreign rivals like
. Meanwhile, if gas prices and interest rates continue to climb and crimp consumer spending, all bets are off in Detroit.
current oil price levels persist, which the market is not expecting, then it would seriously dent sales of SUVs and pickup trucks, and any chance of a sales rebound at
GM and Ford for the rest of the year," says Brian Johnson, an analyst with Sanford C. Bernstein.