Shares of General Motors, which surged last year on early turnaround indications, could stall now as the automaker comes to terms with sliding market share and continued cash burn, according to analysts.
Growing investor confidence in GM's turnaround drove the stock up more than 62% in 2006, making it the best performer in the Dow Jones Industrials average. GM stock also outgained the S&P Auto Component Index by a 2-to-1 margin.
But analysts and investors have now begun to worry that the automaker's best recovery news might be behind it.
GM shares, which were below $19 at the start of 2006 and climbed to $37 last month, are now priced around $32.
"We'd say it's a fully-priced stock here," said Tim Ghriskey, chief investment officer at Solaris Asset Management. "It would be very hard for it to gain significantly from here unless they can reverse market share declines, and that will take a while. I don't see what else they can do."
GM, which lost $10.6 billion in 2005 and $2 billion in 2006, is in the middle of a sweeping restructuring that includes cutting more than 34,000 jobs and closing 12 plants.
It could also include the acquisition of the Chrysler Group.
Under GM's offer, DaimlerChrysler would get a minority stake in GM stock of less than 10%, The Detroit News reported. In turn, DaimlerChrysler will pay GM more than $1 billion to defray Chrysler's health care costs and the two will seek financial concessions for Chrysler from the United Auto Workers. The offer does not include any cash payment for Chrysler. DaimlerChrysler rejected GM's bid as too low, though it remains on the table.
The company posted a fourth-quarter profit in March but said it expects results from its former finance unit, GMAC, in which it retains a 49% stake, to remain under pressure this year due to mounting mortgage losses in the subprime market.
Calyon Securities analyst Joe Amaturo lowered his price target on GM shares to $30 from $36 this month.
"We do not believe the risk/reward profile is overly compelling at current levels," Amaturo said. "Moreover, we believe the worst is not over regarding GMAC's mortgage business and would expect further earnings pressure."
Still Waiting For A Bottom?
GM, which controlled 45% of the U.S. vehicle market in 1980, saw its share shrink to 24% last year. Sales fell 8% in 2006, hurt by high gas prices and a reduction in low-margin sales to car rental companies.
Standard & Poor's equity analyst Efraim Levy said he expects GM to lose more market share this year.
"Including the dilutive impact of the GMAC sale, we think 2006 could be a peak unless GM can continue its steady flow of new products and cost-cutting," he said.
Levy has a "sell" rating on the stock and a target price of $28.
At $16.45 billion, GM's market capitalization is still about one-fifteenth that of rival Toyota Motor, which is expected to challenge GM for the top spot in global sales this year.
Analysts have expressed concern about whether GM, which cut its recurring costs by $6.8 billion in 2006, can cut any further. Some are also raising a caution over GM's inventory levels, which are expected to rise this year, pushing the automaker to use profit-reducing incentives to sell vehicles.
Another uncertainty looms with upcoming contract talks between GM and its major union, the United Auto Workers.
GM has said it will look to cut its annual $4.8 billion health-care bill, but it is unclear what kind of concessions it can wring from the union. Negotiations are to begin this summer.
In 2006, the UAW agreed to help GM with its costs by shifting some health-care costs back to retirees, and GM remains in talks with the union and its former subsidiary, auto parts maker Delphi, over the terms of that supplier's emergence from bankruptcy.
David Feinman, a fund manager with Havens Advisors who specializes in distressed debt, said GM bonds would have to fall a bit before he would buy them.
"GM has had many positive things happen in the past year -- there was the health-care concession from the UAW, the progress with Delphi, the GMAC sale, improved financial performance," he said. "I think the bonds got a bit ahead of themselves."
S&P credit analyst Bob Schulz, who has a negative rating on GM, said the automaker faces "daunting competitive and structural challenges" in its home market of North America.
"We still consider prospects for a sustainable recovery to be fragile and vulnerable to a host of challenges in 2007, including consumer demand, raw material costs, and the outcome of the fall 2007 labor negotiations," Schulz said.
Bear Stearns analyst Peter Nesvold said, "All considered, we're still left awaiting a bottom in the stock."