Wall Street Downshifts GM Forecasts

After the past year's big rally, the automaker's stock may stall.
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After an epic rally in shares of

General Motors

(GM) - Get Report

that lasted longer than a year, signs are emerging that the stock is losing momentum on Wall Street.

On Friday, JPMorgan analyst Himanshu Patel lowered his profit outlook through 2009 for the largest U.S. automaker, citing a variety of factors. That followed

Thursday's downgrade from Bear Stearns analyst Peter Nesvold, who said the stock was getting too pricey.

Thomson First Call analyst John Butters says Wall Street's overall outlook on the stock dropped this week from just above neutral to between neutral and sell. That signals that investors who were emboldened by GM's aggressive restructuring efforts last year are shifting focus back to the automaker's continued sales declines and market share losses.

"We're seeing a negative reaction to GM's sales results for June, which were a big disappointment," says Burnham Securities analyst David Healy.

On Tuesday, GM reported a steeper-than-expected 21% plunge in U.S. sales for June, far worse a performance than those of rivals

Ford

(F) - Get Report

and

DaimlerChrysler

(DCX)

. GM said its car sales slid 22% for the month on an adjusted basis to 138,351 vehicles, while truck sales tumbled 25% to 187,949 trucks.

"Those results were awful, but we're seeing a bit of an overreaction to one month's results," says IRN analyst Erich Merkle.

Merkle says competitors such as

Toyota

(TM) - Get Report

surprised the auto industry with aggressive pricing incentives in June to clear out inventories, and he believes GM's sales will recover in the months ahead.

That said, Merkle points out that U.S. sales in June were disappointing for the entire auto industry, and he sees further weakness in the second half of 2007 as the slump in the nation's housing market continues to wear on the broader economy.

"At best, shares of GM will probably move sideways from here until we see signs that U.S. auto sales are recovering from this weakness we're seeing now," says Merkle.

After a big plunge in 2005, shares of GM soared 58% last year and led the

Dow Jones Industrial Average

in gains as the company began restructuring its bloated operations and revamping its products to compete with low-cost competitors from abroad.

This year, the rally continued based on the premise that organized labor is ready to make concessions to the U.S. auto industry in its upcoming negotiations on a new master labor contract in order to avert a bankruptcy at one of Detroit's Big Three. Shares of GM are up 21% for 2007 at around $36.50.

Shareholder Value Management analyst Jeff Embersits says the stock is a good short at anywhere above $35.

"Wall Street isn't understanding how much work is still left to be done at this company before it can effectively compete in the global marketplace," he says. "It can win some cost concessions from labor this year, but it will take years before that starts showing up on its bottom line, and in the meantime, it's facing some serious challenges in terms of selling cars that the masses want to buy."

JPMorgan's Patel now expects GM to post earnings of $3 a share for 2007, down from his previous estimate of $3.50 a share. For 2008, he cut his profit forecast to $3.60 from $4.10 a share, and for 2009, he lowered his outlook to $3 from $4.30.

In a note to clients, Patel said that some of his changes resulted from GM's sale of its Allison Transmission commercial and military business. The company recently announced a deal to

sell the business to a private-equity firm for about $5.6 billion.

Patel also noted concerns about GM's recent settlement with workers at

Delphi

, its chief auto parts supplier and former subsidiary that is mired in bankruptcy proceedings. GM is expected to pick up the tab for much of the company's restructuring plans.

Meanwhile, Patel echoed his counterpart at Bear Stearns in pointing out the recent run-up in GM's stock price and its continued sales declines and market-share losses amid a dismal outlook for the auto industry.

"We continue to be intrigued by the labor cost restructuring potential at GM, but see near-term trading pressures caused by weak U.S. demand and the potential for consensus estimates to drift down as the market factors in the impact of Delphi and Allison agreements," said Patel.

Shares of GM were recently down 25 cents, or 0.7%, to $36.51.