General Motors Corp. shares sank Wednesday to their lowest level in more than 50 years after brokerage firm Merrill Lynch raised the specter of bankruptcy for the biggest U.S. automaker.
Other Wall Street analysts also issued gloomy reports, stoking concerns that GM might run short of cash, given the swift and unexpected deterioration in the U.S. auto market.
GM shares closed down $1.77, or 15.06 percent, at $9.98, leading a broad decline in the Dow industrials in what is now officially a bear market.
GM's stock had rallied Tuesday, briefly rising as much as 12 percent in a volatile session after the struggling company reported lower, but better than expected, sales results for June. The stock finished up 2 percent for the day, but erased those gains and more on Wednesday after Wall Street analysts spooked already nervous investors.
“The Merrill Lynch analyst was one of the last tepid bulls on GM,” said David Sowerby, senior portfolio manger at Loomis, Sayles & Co. LP investment management in Bloomfield Hills. “He was the last guy defending the bunker.”
In a note to investors, Merrill analyst John Murphy said he expected GM's stock to fall to $7 and forecast “significant losses” for GM this year and next. He said the automaker was going through cash at a rapid rate because of the deterioration in the auto market and would need to raise around $15 billion to keep the business going.
“We believe there is potential downside in the stock below $7 and that bankruptcy is not impossible if the market continues to deteriorate and significant incremental capital is not raised.”
GM said in May that it had $24 billion in cash and access to another $7 billion of undrawn credit.
“As we've said repeatedly over the past several weeks, we have adequate liquidity through 2008, and we have other levers to pull, should we need them, in the future,” GM spokesman Tony Cervone said Wednesday.
But concerns persist because of the auto market's sudden weakness. Car and truck sales are expected to fall this year to their lowest level in more than a decade, as a shaky economy and $4 gas have left consumers rattled. Adding to the stock market's worries about the U.S. economy, crude oil prices hit a record of $144.32 a barrel during the day in New York.
GM has made big strides, restructuring its North American operations and developing attractive vehicles, Murphy said.
The automaker has announced big cuts in production of large trucks and SUVs, vehicles that had been its biggest source of earnings, and it is ramping up output of cars.
But Murphy said the market's steep fall is undercutting those recovery efforts.
During the past year, the stock has fallen more than 70 percent, Sowerby said. “Stocks that drop that much mean that either a bubble burst on the stock or there is a serious question on its long-term survivability. And in the case of GM, we know there wasn't a bubble.”
Citi Investment Research analyst Itay Michaeli said he did not believe that GM is facing “an immediate cash crunch” but slashed his price target on GM shares to $14 from $21, citing its likely need to bolster its liquidity later this year and next.
Bear market is official
Industrial companies are among the hardest hit in the current downturn, with 24 of the 30 Dow stocks losing value Wednesday.
The index officially moved into bear territory, closing at 11,215.51, down 1.46 percent for the day and more than 20 percent off its October high of 14,164.53. A bear market is characterized by generally pessimistic sentiment and falling prices in a declining economy.
On Tuesday, investors were briefly heartened when GM reported an 18.2 percent sales drop – a decline that was smaller than feared. GM also performed better last month than its chief rivals after offering generous zero-percent financing and other incentives.
But Deutsche Bank analyst Rod Lache reminded investors in a note Wednesday that incentive-fueled gains tend to be followed by lulls in demand. He said he expected GM's market share to drop to the 19-20 percent range from 22.1 percent in June.
“We continue to question whether GM will be able to sustain eight different brands and over 13,000 franchises with less than 20 percent market share,” he wrote.
“We believe Ford is best positioned among the Big Three,” he added. “Its liquidity position should allow Ford to sustain a protracted downturn. In addition, we continue to believe that Ford is the most 'fixable' of the three U.S. automakers.”
Ford shares fall
Ford had access to $40.6 billion at the end of the first quarter — $28.7 billion in cash and securities and $11.9 billion in committed credit facilities.
But Ford's cash burn rate also is accelerating. In May, Ford upped its estimate from between $10 billion and $12 billion annually through 2009 to $12 billion to $14 billion. That has many on Wall Street guessing the company will need to tap additional liquidity to complete its global restructuring.
Ford's shares also fell sharply Wednesday, closing down 7.43 percent at $4.36.
