Can buyouts and an alliance jump-start GM?
(Fortune Magazine) -- It's been a dizzying few weeks for General Motors. In late June it announced a better-than-expected response to its buyout program. But June sales were disappointing, and the company launched a new promotion to clear inventory. Now GM's largest shareholder, Kirk Kerkorian, is playing matchmaker for an alliance with Nissan-Renault. We asked two leading analysts to tell us what it all means for the stock (GM, $29).
Mike Bruynesteyn, Prudential: Overweight. Target price: $32
The progress on the buyout is very encouraging, but I also think the market didn't realize how strongly GM (Charts) is emphasizing that its mix is working, with a lot of high-trim models sold in each line. The vehicle sales were down a lot on a year-to-year basis because GM had an abnormally strong June last year. But its market share was 27%, the best we've seen in almost a year.
Second-quarter earnings should be solid, and we should see more progress on Delphi. They still have to come up with a plan for workers who won't take the buyout or retire, and they've got to settle their pricing dispute. We're seeing upside earnings revisions for GM, and that's also a positive catalyst for the shares.
The Nissan-Renault alliance is a very interesting opportunity. There's potential to save on R&D for diesels, hybrids, and fuel cells. There can be purchasing synergies, the sharing of vehicle platforms and infrastructure costs, and possibly absorption of some excess GM capacity. And Carlos Ghosn [CEO of Nissan and Renault] is a known agent of change. Just having him on GM's board, even if he didn't take an active management role, would likely be a significant positive.
Jon Rogers, Citigroup: Sell. Target price: $20
The number of employees taking the buyouts is encouraging, but just because costs go down doesn't mean management should take a victory lap. Our focus remains on the revenue side. Part of the North America turnaround is reducing capacity; another part is selling [financing arm] GMAC. GM remains a viable company, but it's going to be smaller, and the process of shrinking is very painful for investors.
Sales volume has declined every month this year. Those are the numbers that will be important. Look at the great turnarounds in history. Cost cutting was a very important part of it, but it was also about market-share gains. Look at Chrysler in the early '80s, Chrysler in the early '90s, Nissan in 2000. They all gained market share in primary markets. There was one vehicle you could point to: the K car, the minivan, the Altima. I can't find that for GM right now.
An alliance with Nissan-Renault could certainly allow for greater cost cutting, but it doesn't help on the revenue side because Nissan is losing market share in the U.S. Carlos Ghosn is highly respected and could certainly do well with any company that he manages, but the fundamentals don't change because one investor has an idea.
From the July 24, 2006 issue