Filed Under:
Tickers in this Article: GM, F
A weak November sales forecast for auto manufactures followed a 17-year low monthly sales figure in October. General Motors (NYSE:GM) has been spending its way into the poor house and is now seeking federal aid to survive and keep its employee base. At the present, the government is reluctant to provide bailout funds to General Motors, Chrysler or Ford (NYSE:F) for operations or to assist with mergers.

Many are now wondering if the Big Three will go bankrupt without a federal aid package (in GM's case the question seems moot), but the multi-billion-dollar question is, can they survive even with a bailout?

Weak Auto Sales
Retail sales fell by a record 2.8% in October, according to the Commerce Department, the largest amount reported since recording of retail sales began. Auto sales led the decline falling 5.5% during the month. Consumers are clearly struggling and holding off making key purchases such as automobiles. Instead consumers are spending their incomes on increased food and gasoline prices. General Motors had the worst sales number of the major three with a drop of 45% during the prior month. Tight credit also created problems for the domestic auto manufacturers as they have been unable to offer low interest rates and affordable financing to boost sales as they have done in the past. (For more, read Using Consumer Spending As A Market Indicator.)

Cash Burn
The companies have needed to spend cash on hand to keep operating even while cutting costs. All three companies, General Motors, Ford, and Chrysler, burned through cash in the previous quarter with GM and Ford spending $14.6 billion combined. GM cut white-collar jobs and reduced its planned capital spending budget to conserve cash. Ford is looking to cut an additional 10% of payroll costs after cutting 15% earlier in the year. But such cost cutting did not relieve the companies from the need to spend their available cash.

Get Your Own Bailout
Treasury Secretary Henry Paulson is encouraging Congress to support the American auto manufacturers during their current sales decline by providing new loans to the companies. But he does not want to dip into the $700 billion bailout account setup for financials to help them through this rough period.

Goldman Sachs has of late estimated that GM needs $22 billion in federal aid to avoid insolvency. A number of auto parts manufacturers in Michigan, Indiana, Missouri, Kentucky, and Tennessee are also looking for federal funds as their business have been affected in kind by the sales declines.

Republican lawmakers want to make sure that any financial aid to the car companies will lead them into a competitive position and not just allow them to survive a little bit longer with unviable products. Spending tax dollars on bailouts that do not produce financial returns for the government in the long-term appears to be something conservative members of congress are against.

The Fundamental Problem
Fundamentally the Big Three could hardly be in worst shape. General Motors is now expected to have an earnings-per-share loss of $6 when it reports in December for the current quarter. This is a drop from a loss of about $3 per share predicted just three months ago according to Thomson Financial Networks. Ford, in a similar way, has seen its estimated earnings for the fourth quarter cut 42% over the past 90 days by analyst of the company from a loss of 66 cents per share to a loss of 96 cents per share. The companies are in need of fundamental change in products and operating philosophies to reverse these dire assessments. (Learn how this key metric is calculated and how it is used to judge market performance in Earnings Forecasts: A Primer.)

Conclusion
America's auto manufacturers have seen their sales plunge, and they've been forced to burn through their cash while cutting expenses. They may not receive the federal aid to survive that they are hoping. The fundamentals of the companies are very weak and analysts agree that large losses are unavoidable. Passage of a federal loan program may become a necessity soon, if it's not already, but the Big Three will need more than a big bailout to survive. Fundamental change is required.

comments powered by Disqus

Trading Center