General Motors: The Road Remains Risky
General Motors' deal with Delphi and the United Autoworkers Union is positive news for the carmaker, as it allows GM to trim its own work force and that of its largest parts supplier. But cutting labor costs is only one of GM's challenges. The troubled carmaker continues to lose market share to competitors with more-popular products, and employee health-care and retiree costs remain a heavy burden. With the road ahead still strewn with obstacles, investors would be wise to avoid this painful ride.
The UAW agreement, which offers early retirement to some Delphi and GM workers and gives certain Delphi workers the opportunity to return to GM, averts what would have been a debilitating strike (GM spun off Delphi in 1999). But the deal doesn't come cheap: GM will likely pay billions of dollars for the worker buyouts. And the negotiating isn't over. "Unfortunately, critical issues such as hourly worker pay concessions have yet to be resolved," says Standard & Poor's analyst Efraim Levy.
The number-one U.S. carmaker hemorrhaged red ink in 2005, reporting a loss of $8.6 billion -- its worst result since 1992 (and management recently said that it would restate its 2005 earnings report, adding about $2 billion more of red ink to the bottom line). GM hopes that its cost-cutting plan, which involves closing factories and reducing wages and benefits, including retiree benefits, will help cover the gap left by slumping sales. "GM's current strategy, although not explicitly stated, is to survive while shrinking to profitability," says Morningstar analyst John Novak. The company also cut its dividend in half recently.
GM is trying to bring production more in line with declining sales. But because cost-cutting can only go so far, GM also must boost sales by developing more cars that consumers want -- something it's had a hard time doing lately. GM faces an uphill battle competing with Toyota, Honda, Nissan and other foreign brands. Levy expects the company to continue to lose market share, although he holds out hope that GM's new line of trucks and utility vehicles will help return the company to profitability in 2006. Analysts, on average, expect the company to lose 20 cents per share in 2006, according to Thomson First Call.
Both SP and Morningstar recommend selling the stock (symbol GM), recently $22.