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From the Detroit Free Press:

GM, Ford SUV woes are concern to analysts

Doubts are cast on future profitability

October 5, 2005


Wall Street investors and a major credit-rating agency are getting increasingly concerned that plummeting SUV sales will weigh down future profits for General Motors Corp. and Ford Motor Co.

Brokerages Merrill Lynch and Goldman Sachs issued notes to investors Tuesday, citing their concerns about an accelerated move out of truck-based SUVs into cars and crossovers.

Sales of SUVs were down 30.4% in September, compared to the same month a year ago, and they are down 7.9% for the first nine months of the year.

"We reiterate our concern about the profit drag from selling fewer SUVs," Goldman Sachs analyst Robert Barry wrote to investors.

Merrill Lynch analyst John Casesa echoed similar concerns. The domestic automakers, he wrote, "have the most to lose from this trend, as SUV sales represent a much larger proportion of their sales."

He added, "We are growing increasingly concerned about the prospects of GM's new line of SUVs, which will be launched in January 2006."

Also citing declining SUV sales Tuesday, the credit-rating agency Standard & Poor's said it is reviewing GM and Ford operations and will decide by mid-January whether to move their credit ratings lower in junk status.

Standard & Poor's downgraded Ford and GM to a speculative-grade, or junk, investment in May. The downgrades signaled that the companies face an adverse business climate that makes them more likely to default on their loans.

It means GM and Ford could have more difficulty raising money, because many institutional investors cannot buy speculative-grade debt.

During a conference call, Standard & Poor's auto analysts Scott Sprinzen and Robert Schulz said they will embark on a detailed review of GM's and Ford's North American businesses and allow several more cycles of sales and earnings to be reported before they make another decision about the automakers' ratings.

If the credit rating agency downgrades GM and Ford further into speculative status, it would signal that the automakers' business outlook and ability to pay off debts are growing riskier. As of June 30, GM had $284 billion in debt, and Ford had $158 billion, S&P said.

The agency did not say how much it might downgrade GM. It described additional concern about GM's relationship with former parts supplier Delphi Corp., a tie it said could "have significant adverse consequences for GM."

Delphi has told its former parent company that it may file bankruptcy by Oct. 17 without financial relief from GM and concessions from the UAW. At the same time, investors are awaiting results from months-long negotiations between the UAW and GM on cutting the automaker's health-care costs. GM made no statement on either issue following a board meeting Tuesday. Its stock closed down 96 cents, or 3.19%, to close at $30.08.

Sprinzen and Schulz said GM and Ford face many similar problems. Falling sales, especially of SUVs, and market pressures to lower prices are major concerns for both automakers.

Sales are down 1.3% for GM and 1.4% for Ford through the first nine months of 2005. What's more, GM's sales of SUVs are down 15.6% for the first nine months of the year, compared to the same period a year ago, and Ford's sales are down 20.9%, according to an analysis from Autodata Corp.

Still, S&P expressed more confidence in Ford's plan, saying it might downgrade Ford only one notch, if at all.

Standard & Poor's focused on GM's product cycle in particular.

"Given the current environment with gasoline prices, the fact that GM's major actions are so heavily weighted in mid- and large SUVs, that seems problematic," Sprinzen said.

Sprinzen said double-digit gains GM and Ford are making in the crossover segment might not offset the financial issues the SUV losses pose.

He said S&P will consider the GM and Ford product mix when it makes its credit rating decisions.

GM's crossover sales are up 30% so far this year. Ford's are up 41.9%.

GM spokesman Jerry Dubrowski said the automaker had no comment about Standard & Poor's review, except that GM is working on improving its North American operations.

"We are working hard on that process right now," he said.

A spokesman for Ford did not return a phone call for comment.
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