$7: GM Should Tumble on Merrill's Pessimism

[Hurricane]

GM Should Tumble on Merrill's Pessimism

Merrill Lynch downgrades General Motors (GM) to Underperform from Buy, lowering their price objective significantly to $7, and lowering estimates to significant losses for 2008 and 2009. The key change in the firm's outlook is a much lower forecast for U.S. auto sales that is driving a higher cash burn, necessitating a much larger capital raise than the market is currently anticipating. Furthermore, Merrill believes there is potential downside in the stock below $7 and that bankruptcy is not impossible if the market continues to deteriorate and significant incremental capital is not raised. Although they believe GM has made strides in restructuring and has built a solid product pipeline, there are three recent factors that dwarf management’s best efforts.

Merrill now believes that much higher cash burn is likely to result in the need for a larger capital raise than anticipated, likely about $15 billion (including revolver draws), which would materially dilute return of value to existing shareholders. They also believe the company has not recognized the stress in the capital markets. As time passes, the supply of capital for GM to bridge the gap to 2010 is becoming increasingly scarce, which is at least driving up the cost.

The recent drastic drop-off in sales, which is likely to continue through 2009, has been more severe than anyone anticipated.

The mix shift away from body-on-frame large SUVs that was generally expected over the next few years has been pulled forward to present day with the spike in gas prices and has been more extreme than expected. This has essentially rendered the large SUV segment obsolete, cutting into GM’s profit potential.

Notablecalls: Lots of unhappy buyers from yesterday. I suspect GM will trade below $11 as soon as today.

More here: http://seekingalpha.com/article/8353...m?source=yahoo

[FenwickHockey65]

Sometimes I wonder if they really know what they're talking about...the entire industry's in decline isn't it? Why haven't they talked about Ford? They're doing worse than we are. Toyota was down this month, too, let's downgrade them as well. Hell, they did worse than we did this month.
I think it's time that people stopped believing every word these guys said...in reality, they're only hurting the companies in the end.

[xPUMPx]

then again i think they may be right, economic forces are REALLY dictating this slide. GM just seems to be getting hit the hardest due to mismanagement. The company is practically worthless compared to several others andthey have more obstacles than many others. Kind of a timing thing i suppose. IF all the companies saw a 35% loss in sales this year GM would be the one that suffered most due to operating costs.

[xPUMPx]

they are losing a TON of money on this 0% financing so they are almost slitting thier own throats to get these sales.

[wescoent]

Originally Posted by FenwickHockey65

Sometimes I wonder if they really know what they're talking about...the entire industry's in decline isn't it? Why haven't they talked about Ford? They're doing worse than we are. Toyota was down this month, too, let's downgrade them as well. Hell, they did worse than we did this month.
I think it's time that people stopped believing every word these guys said...in reality, they're only hurting the companies in the end.

They know exactly what they're talking about.

For starters, as mentioned, GM's incentives this month saved their sales, but destroyed their balance sheets.

Ford saw a bigger sales decline, but stayed away from heavy incentives, and saved money. More importantly, Ford has Kirk Kerkorian on their team, and he is MORE than willing to put up the cash Ford needs to see itself through this crisis. Who does GM have on their team willing to put up the cash?

Ford also has competant management on the top...

[ericmvest]

Originally Posted by wescoent

They know exactly what they're talking about.

For starters, as mentioned, GM's incentives this month saved their sales, but destroyed their balance sheets.

Ford saw a bigger sales decline, but stayed away from heavy incentives, and saved money. More importantly, Ford has Kirk Kerkorian on their team, and he is MORE than willing to put up the cash Ford needs to see itself through this crisis. Who does GM have on their team willing to put up the cash?

Ford also has competant management on the top...

Did not Merrill Lynch recently fire their CEO Stanley O'Neal for gross mismanagement? He had a big golden parachute too. What are you saying, it takes an incompetent company to know one? My guess is that General Motors is better than the Merrill Lynch analyst states.

[Clownzilla]

Originally Posted by wescoent

They know exactly what they're talking about.

Lol, no they don't! These are the exact same people who spew s*** "analysis" out of their mouths to boost oil prices. The only thing these people analyze is how to make their own wallet fatter.

[rsinsel]

Originally Posted by FenwickHockey65

Sometimes I wonder if they really know what they're talking about...the entire industry's in decline isn't it? Why haven't they talked about Ford? They're doing worse than we are. Toyota was down this month, too, let's downgrade them as well. Hell, they did worse than we did this month.
I think it's time that people stopped believing every word these guys said...in reality, they're only hurting the companies in the end.

If this market continues they will. Talk of Toyota. However, GM is near the bottom and has fewer resources to weather this storm. Toyota could face this for a decade or longer before the cash burn hurts them.

[wescoent]

Originally Posted by ericmvest

Did not Merrill Lynch recently fire their CEO Stanley O'Neal for gross mismanagement? He had a big golden parachute too. What are you saying, it takes an incompetent company to know one? My guess is that General Motors is better than the Merrill Lynch analyst states.

No... I'm saying the humble analyst putting in 100 hour weeks know what he's talking about. Merrill's executive management has nothing to do with this, any more than the competance of a GM assembly line worker has nothing to do with how competant Rick Wagoner is.

The key issue here is that GM needs cash. It needs cash to fund product development, and it simply did not anticipate a sales slide this severe. Ford did, and got a loan a couple of years ago to cover their asses just in case.

If GM can't get the cash, they're up the river. Hence, the stock downside.

[wescoent]

Originally Posted by Clownzilla

Lol, no they don't! These are the exact same people who spew s*** "analysis" out of their mouths to boost oil prices. The only thing these people analyze is how to make their own wallet fatter.

As a former analyst myself, I assure you... we know what we're talking about, even if you don't like what we're saying.

[A Bum In A Bus]

Up Yours Merrill Lynch, you market people are so freaking smart , no wonder the country is in such a mess. Get your heads out of your beehind, you have no clue what GM will do in the next 12 months, or the economy.

[A Bum In A Bus]

Originally Posted by wescoent

As a former analyst myself, I assure you... we know what we're talking about, even if you don't like what we're saying.

Bull----! The only thing market analyst know how to do is run their mouths.

[PhishPhood]

Originally Posted by rsinsel

If this market continues they will. Talk of Toyota. However, GM is near the bottom and has fewer resources to weather this storm. Toyota could face this for a decade or longer before the cash burn hurts them.

It doesn't have a cash burn. It's profitable with a positive cash flow. The decline in sales simply means a decline in profits. But to a company with no debt it's like your neighbor who has a paid off house, boat, 3 cars and vacation house saying that his small business had it rough last month. It only made $500,000 instead of the $600,000 it made in May.

OTOH that means that he's $500,000 better off than he was the month before.

[FenwickHockey65]

Originally Posted by wescoent

As a former analyst myself, I assure you... we know what we're talking about, even if you don't like what we're saying.

Still, sometimes I wonder. It seems as if whenever an analyst says something, everyone goes crazy and paranoia breaks out at Wall Street. In effect, this could end up with the same result as the analyst predicted BECAUSE he or she said it would happen. Cause and effect. Let's say, for example, that an analyst predicts that GM stock will fall below $7/share. People panic and unload their stock in droves. Sooner or later, GM stock does indeed fall below $7/share. But, one must wonder, if the analyst kept his mouth shut, would that have happened?

[wescoent]

Originally Posted by FenwickHockey65

Still, sometimes I wonder. It seems as if whenever an analyst says something, everyone goes crazy and paranoia breaks out at Wall Street. In effect, this could end up with the same result as the analyst predicted BECAUSE he or she said it would happen. Cause and effect. Let's say, for example, that an analyst predicts that GM stock will fall below $7/share. People panic and unload their stock in droves. Sooner or later, GM stock does indeed fall below $7/share. But, one must wonder, if the analyst kept his mouth shut, would that have happened?

The best analogy I can think of would be a weather forecaster predicting a flash flood due to a rainstorm, and causing people to evacuate an area. If he didn't say anything, people would evacuate anyway once they were knee-deep in water, and they didn't get a chance to save their valuables. However, if he predicted this flash flood, and people evacuated, and the rain never came, they'd be calling for his head on a stick.

If the analyst kept his mouth shut, and GM reported a MASSIVE 2nd quarter loss, GM shares would fall below $7 anyway. The purpose of an analyst is to research the market, and give both stock investors and their investment firm a heads-up as to likely future events.