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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
--Lisa Dixon
-
Forget FIRE: Why ‘FILE’ Is the Smarter Move for Child-Free DINKsHow shifting from "Retiring Early" to "Living Early" allows child-free adults to enjoy their wealth while they’re still young enough to use it.
-
7 Tax Blunders to Avoid in Your First Year of RetirementA business-as-usual approach to taxes in the first year of retirement can lead to silly trip-ups that erode your nest egg. Here are seven common goofs to avoid.
-
How to Plan for Social Security in 2026's Changing LandscapeNot understanding how the upcoming changes in 2026 might affect you could put your financial security in retirement at risk. This is what you need to know.
-
If You'd Put $1,000 Into Lowe's Stock 20 Years Ago, Here's What You'd Have TodayLowe's stock has delivered disappointing returns recently, but it's been a great holding for truly patient investors.
-
If You'd Put $1,000 Into 3M Stock 20 Years Ago, Here's What You'd Have TodayMMM stock has been a pit of despair for truly long-term shareholders.
-
If You'd Put $1,000 Into Coca-Cola Stock 20 Years Ago, Here's What You'd Have TodayEven with its reliable dividend growth and generous stock buybacks, Coca-Cola has underperformed the broad market in the long term.
-
If You Put $1,000 into Qualcomm Stock 20 Years Ago, Here's What You Would Have TodayQualcomm stock has been a big disappointment for truly long-term investors.
-
If You'd Put $1,000 Into Home Depot Stock 20 Years Ago, Here's What You'd Have TodayHome Depot stock has been a buy-and-hold banger for truly long-term investors.
-
What the Rich Know About Investing That You Don'tPeople like Warren Buffett become people like Warren Buffett by following basic rules and being disciplined. Here's how to accumulate real wealth.
-
3M, GM, Blue Chips Lead to the Upside: Stock Market TodayThe S&P 500 followed the Dow Jones Industrial Average into green territory, but the Nasdaq lagged the other indexes because of its tech exposure.
-
If You'd Put $1,000 Into Bank of America Stock 20 Years Ago, Here's What You'd Have TodayBank of America stock has been a massive buy-and-hold bust.
