America's largest automaker is in serious trouble, and the markets know it. The value of General Motors stock plunged to its lowest point in decades late Thursday, and did not recover significantly on Friday.
Bloomberg reports that the price of GM stock "fell to its lowest point since 1974 after Goldman, Sachs & Co. cut its rating on the shares to 'sell' because of a worsening sales outlook." Goldman isn't the first financial giant to provide warnings about GM's state. Fitch Ratings cut GM's long term debt rating last week, and "on June 23, Bank of America told investors that the automaker might need to raise as much as $8 billion." Analysts believe the automaker may need to spend extraordinary amounts of cash to re-tool its product line and reconfigure its workforce to suit the changing needs of American consumers. "By 2010, GM may go through $18 billion in cash, leaving it with $8.7 billion," according to the Goldman analysis. A similar estimate from Deutsche Bank predicts "that GM may use up $19 billion," against a market capitalization estimated at $10 billon.
An early Reuters report, we should note, called Thursday's price the lowest since 1955. The Los Angeles Times was unable to verify that claim, saying "it isn't clear...that the Reuters calculation adjusts for GM stock splits that occurred in 1950 and 1955 (according to Standard & Poor's). As you might imagine, 50-year-old stock data isn't easy to come by."
According to the Detroit News, CEO Rick Wagoner told reporters last week "that GM has enough cash to get through the year. He declined to discuss options for cash beyond that."
An AP report adds, "Wagoner told reporters Thursday that the Detroit-based automaker has adjusted to the change in consumer demand from trucks and sport utility vehicles to cars and crossovers, and that it has ample liquidity."
But some analysts see little chance to head off catastrophe. Jim Cramer wrote late last week in The Street, "I rack my brain trying to figure out how they can raise enough money to not run out of money." The most reasonable option, he argues, is to "abrogate everything, put the company in receivership," and "let it be recapitalized by Cerberus in a Chrysler merger." GM in bankruptcy may be a startling thought, but Cramer argues, "This is a $6 billion company that owes too much and can't pay with big residential losses we can't even fathom. We don't want it to cease to exist. So I think this course of action is the rational, smart thing to do."
"Indeed," Barron's reports that late last week, "some [funds] designed for individual investors are selling at about 50 cents on the dollar-almost as if GM were headed for bankruptcy."
The Los Angeles Times notes, however, "Filing for bankruptcy protection, most analysts agree, would be a last resort for any of the carmakers, and it is unlikely one would do so in the near term. Moreover, there are questions about whether bankruptcy would do more harm than good."
Another negative milestone may be close. The Wall Street Journal reports, "General Motors Corp. is on the brink of losing its position as the top-selling car maker in the U.S. to Toyota Motor Corp., and on Tuesday it may see its lead narrow further when the auto industry reports vehicle sales for June."
GM may not even be the U.S. automaker closest to the brink. The Detroit Free Press reports, "While Chrysler LLC gathered journalists from around the world last week to its Chelsea Proving Grounds to show off its 2009 model year lineup, there are growing concerns about the future of the Auburn Hills automaker." Merrill Lynch's annual Car Wars report, "an influential annual study of the U.S. automotive product pipeline," predicts that "Chrysler's lack of future product plans is an indication of a near-future breakup or sale by the automaker's majority-owner, Cerberus Capital Management." A Cerberus spokesman dismissed the claim as "ridiculous."