Updated from Jan. 13

General Motors ( GM) shares slipped early Friday after the company's multiyear earnings affirmation Thursday failed to halt a five-day slide in the stock and a proposed strategic move appeared to signal the possibility of a credit downgrade.

GM was off 18 cents, or 0.5, to $37.14, a new 52-week low, after losing 2.8% in heavy trading yesterday. The stock is down about 7% since the start of the year.

In an afternoon press release Thursday, the No. 1 automaker said 2004 earnings will be in line with previous guidance of $6 to $6.50 a share, excluding items. Analysts surveyed by Thomson First Call are currently forecasting 2004 earnings of $6.31 a share.

For 2005, GM reiterated an earnings target of $4 to $5 a share, excluding items. The consensus analyst estimate is for earnings of $4.78 a share.

"The lower earnings projection for 2005 may have something to do with the stock's decline," said David Healy, analyst with Burnham Securities. "The $4 to $5 a share target is considerably below what they're actually going to do in 2004, probably because of higher healthcare and other legacy costs in the U.S."

"Attaining annual earnings of $10 per share remains GM's goal," the company said in a Thursday press release. It "could be achieved as early as 2007 as a result of a strengthening product portfolio in North America, improved performance in Europe and an expected strengthening of the market in China."

While GM's forecasts weren't out of line with existing estimates, they put in bold print the likelihood of declining earnings this year, analysts said.

The slide in the company's stock price began Monday, when CEO Rick Wagoner declined to comment on the $10-a-share earnings goal in a meeting with reporters. Thursday's release appeared to revive the target.

"We will achieve our 2004-earnings objectives despite a tough competitive environment," the company said, highlighting a strong performance in financial services and market-share gains in three out of four automotive regions. GM expects "record" profitability in the Asia Pacific region and a return to profitability in its American/Africa/Mid-East region.

Heavy selling in GM's shares kicked in earlier Thursday after the company said in a filing that its GMAC finance unit might set up an independent mortgage unit. The statement raised concerns in credit markets that the company was preparing for a debt downgrade. Spreads on the company's publicly traded debt widened.

In its afternoon release, GM said GMAC "will continue to be a significant contributor to GM's financial performance in 2005" and will likely pay GM a dividend of more than $2 billion this year. The company sees GMAC profits of $2.5 billion in 2005, probably down from 2004 as interest rates rise.

"GMAC, which in recent years has transformed itself from what was predominantly an auto-finance unit into a highly diversified financial-services company, is focused on producing strong sustainable earnings," GM said.

While the market reacted negatively to signs that the company is increasingly concerned about its credit rating, Sean Egan, managing director with Egan-Jones Ratings, said shielding its mortgage unit would be a smart move for GMAC.

"They don't have very many attractive cards to play, but this would be an intelligent move given their situation," Egan said. "It could isolate their mortgage unit from at least the threat of a credit downgrade. It also might be preparation for selling assets. GM is going to have to come up with some cash over the next 12 months for funding its pressing obligations to retirees in healthcare costs and pensions. Also, a settlement related to asbestos litigation is probably likely soon, so that's yet another cost, along with rising steel costs and declining market share."

While major credit-rating agencies, like Standard & Poor's, Moody's and Fitch Ratings, still rate GM's debt as one of the lowest forms of investment grade, Egan-Jones has lowered its rating into speculative-grade levels.

"The impact of this is huge, because once they cross that line, they're funding costs increase dramatically, by at least 200 basis points -- possibly even 300 to 400 basis points," Egan said.

As of September, GM's short-term debt totaled roughly $56 billion, while its long-term borrowings come to $235 billion.

"If you factor in the increase in funding costs that comes with a ratings downgrade at such a high degree of leverage, the figures one can arrive at offset all of GM's net income over the last two years," Egan said. "That's very significant, and we don't see anything on the horizon that is going to dramatically change their prospects."

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