Prospects Seen Brighter for GM, but Recall Now Looms

A slew of analyst upgrades greet its March market-share win.

Author:: Kristen French
Publish date:: Apr 3, 2002 3:04 PM EST

Updated from 1:35 p.m. EST

Three analysts raised their earnings estimates for

General Motors

Wednesday, after March U.S. industry sales exceeded expectations and the company made new strides in the Big Three's market share war.

J.P. Morgan Securities raised its 2002 earnings estimates to $4.80 from $4.25, its 2003 earnings estimates to $5.24 from $5 and its 2004 earnings estimates to $5.75 from $5.50. J.P. Morgan also maintained its buy rating on GM and said the company remains its top pick among the big-cap U.S. auto stocks.

Goldman Sachs increased its 2002 estimate to $4.75 from $4.50, and Banc of America Montgomery raised its fiscal 2002 earnings estimate to $3.50, citing GM's increase in second-quarter production. On average, analysts are forecasting earnings for General Motors of $3.79 a share in 2002 and $5.38 a share in 2003.

Investors didn't have long to enjoy the optimism though, as the company announced plans to recall about 1.9 million vehicles. The recall covers 1995-97 model year Chevrolet Cavaliers and Pontiac Sunfires and 1996-97 Buick Skylarks, Pontiac Grand Ams, and Oldsmobile Achievas.

The cars will be serviced to prevent high electrical current flow through the ignition switch that may cause a fire in the steering column, the company said in a statement. GM officials said they don't comment on expenses associated with recalls.

"The question is how much is this going to cost," said Prudential Securities analyst Michael Bruyenstein. "The 1.9 million units is a lot, but it's not going to be a big deal if it costs $25 to fix this thing."

The recall plans were disclosed after the analysts had already released their research. GM's shares traded as high as $60.50 earlier in the session, but lately they were down 46 cents to $59.52. The stock has risen 49% since hitting a four-year low of $40.25 on Sept. 21.

Elsewhere in the sector,

Ford

(F) - Get Report

was down 12 cents to $15.25, and

DaimlerChrysler

(DCX)

was down 49 cents to $44.31.

Analysts attributed GM's modest market share win last month to its popular truck offerings. GM saw its total share of the cars and trucks market edge up to 27.5% from 27.4% in March, while early data suggest that rivals Ford and Chrysler together lost close to three points of market share for the month. Ford is at 22.7% of the market, while Chrysler has 13.6%.

GM's market share is actually down slightly for the year to date, but that's mostly due to drops in lower-profit fleet sales. In the profitable light truck segment, GM continues to gain share.

"The company was losing market share for 30 years," J.P. Morgan analyst David Bradley said in an interview. "There's a lot of luck involved in this. GM made the decision three or four years ago to make a bet on trucks, and it hit on some very successful products, mostly based on its Silverado truck platform." Chrysler had huge market share surge in the 1990s, and Ford won big in the 1980s.

GM also said Tuesday that its factories are churning out new cars faster than it had expected. GM reported that first-quarter North American production was 1% higher than it had originally planned at 1.34 million cars and trucks, and the automaker raised its second-quarter production schedule by 4% to 1.48 million cars and trucks. "These increases reflect the stronger-than-expected industry and the company's need to continue to rebuild still-low dealer inventories," Bradley wrote in his research note.

While U.S. auto sales have slowed in the past several months from the booming levels last fall, they haven't dropped as dramatically as some industry observers had feared. Sales of light cars and trucks fell 1.5% year-over-year to an annual rate of 16.3 million in March. That's 200,000 vehicles higher than Bradley's forecast.

Most analysts now downplay concerns that the late-2001 surge will eat away at 2002's sales. "We expect sales to strengthen as the year progresses, because of an anticipated return to more normal fleet sales, and as the 'paycheck' effect of zero-percent financing in the fourth quarter fades," Bradley wrote. Sales rose to an annualized rate of around 21 million in October after GM, Ford and Chrysler began offering interest-free financing on most cars and trucks.

Other analysts were also upbeat on General Motors. "Recent trends are leading us to become increasingly optimistic regarding the near term outlook for GM," Deutsche Banc Securities analyst Rod Lache wrote in a research note. The analyst said that if his market share estimates of 27.5% for this year turn out to be too conservative, he might need to raise his 2002 earnings estimate of $5.