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.

Comments

[User 183867]

Are you kidding? The last buy on the street lowers his rating and price target and you think that's negative? Bankruptcy risk? Like the CDS market hasn't picked that up yet? Wow. "Seeking Alpha" doesn't mean you're going to find it in this call.

[atauber]

in todays market its enough for a rumor to actually drive you there.......

[marketwatcher2]

Just another broker bidding on sales. In any market there is the sell and the buy and the in-between...GM is a buy at this price and when the Dow as a whole starts it's rise watch GM. GM is a long term investment just as the DOW as a whole is today. S&P 500 doesn't have any real monentum in a down economic forecast.

[pelican]

Marketwatcher,

I don't know if GM is a long term investment. Sure hasn't worked in over 50 years.

[jimsep]

The emperor has no clothes. GM will shrink to a small producer of trucks (SUV's and pickups) That's all the auto industry has.

[sam4786]

Im still bearish for GM. Between the oil crisis, bankruptcy risk and declining sales, I’m feeling pretty bearish on GM and agree with community sentiment at PredictWallStreet (www.predictwallstreet....). Gas price spikes has profoundly shifted consumer behavior across the board and people no longer want SUV’s and trucks. For a company who’s revenues have depended heavily on the sales on these automobiles, GM needs to look into further development of the Volt or even more fuel efficient cars. Consumer reactions to gas prices will not be changing any time soon. GM now needs to react to their consumers behavior. Management needs to figure out a way to implement a new plan in the next few years or faster.

[Jackson1]

Wake up folks! Have you noticed the general economic problems throughout our economy, including Retailing, GENERALLY? We have big problems beyond GM, which is merely a proxy for such!


On Jul 02 12:44 PM jimsep wrote:

> The emperor has no clothes. GM will shrink to a small producer of
> trucks (SUV's and pickups) That's all the auto industry has.

[Daniel Jacome]

you can let a monkey run a strong industry to wealth x 10, but even the best jockey cannot do much with a broken horse...