GM Earnings Annoucement Knocks $2.9 Billion from Market Cap
Brandt Urban, MBA 1
Issue date: 3/21/05 Section: News
- Page 1 of 2 next >
Two weeks ago, the Ross School of Business community heard Dr. Dieter Zetsche, President and CEO of the Chrysler Group, discuss the evolution of the auto industry and how DaimlerChrysler is coping with the change. From last week's revised earnings outlook, it appears that the General Motors Company is not coping with the change as well as some of its competitors.
On March 16, 2005, GM shocked the investing community by slashing its earnings forecast. Prior to last Wednesday's announcement, GM predicted fiscal year 2005 sales would produce $4.00 to $5.00 per share. The announcement reduced the company's estimate to $1.00 to $2.00 per share, which in the best case scenario is a 50 percent reduction. Furthermore, GM reduced its operating cash flow projections by $4 billion to negative $2 billion, and that is before charges for the Fiat settlement and European restructuring.
Investors reacted swiftly, knocking $5.10, or 15.1 percent, from the share price by end-of-day trading on Friday. With 565.1 million shares outstanding, the drop equals a $2.88 billion loss from the company's market capitalization. As industry observers may know, GM has struggled with several problems over the past few years.
Healthcare and Pension Costs
According to the Financial Times, GM spent approximately $5.9 billion on healthcare costs last year, which translates to about $1,400 for every car produced for the U.S. market. Additionally, pension obligations contributed another $800 per car in 2004, which means that last year GM operated with $2,200 of fixed costs unrelated to its property, plant, and equipment.
Fat Inventories
By the end of February of this year, GM held inventories of more than 100 days, which is about 40 days more than its normal levels, according to a Wall Street Journal article. Inventory holdings are a particularly important data point in the auto industry because of the glut of supply in the industry, obsolescence due to model year roll-over, and its impact on incentives. Inventories are also a leading indicator of overall market share, which has declined in North America each of the past three years from 27.9 percent in 2002 to 26.7 percent in 2004, according to GM's 2004 10K report.
On March 16, 2005, GM shocked the investing community by slashing its earnings forecast. Prior to last Wednesday's announcement, GM predicted fiscal year 2005 sales would produce $4.00 to $5.00 per share. The announcement reduced the company's estimate to $1.00 to $2.00 per share, which in the best case scenario is a 50 percent reduction. Furthermore, GM reduced its operating cash flow projections by $4 billion to negative $2 billion, and that is before charges for the Fiat settlement and European restructuring.
Investors reacted swiftly, knocking $5.10, or 15.1 percent, from the share price by end-of-day trading on Friday. With 565.1 million shares outstanding, the drop equals a $2.88 billion loss from the company's market capitalization. As industry observers may know, GM has struggled with several problems over the past few years.
Healthcare and Pension Costs
According to the Financial Times, GM spent approximately $5.9 billion on healthcare costs last year, which translates to about $1,400 for every car produced for the U.S. market. Additionally, pension obligations contributed another $800 per car in 2004, which means that last year GM operated with $2,200 of fixed costs unrelated to its property, plant, and equipment.
Fat Inventories
By the end of February of this year, GM held inventories of more than 100 days, which is about 40 days more than its normal levels, according to a Wall Street Journal article. Inventory holdings are a particularly important data point in the auto industry because of the glut of supply in the industry, obsolescence due to model year roll-over, and its impact on incentives. Inventories are also a leading indicator of overall market share, which has declined in North America each of the past three years from 27.9 percent in 2002 to 26.7 percent in 2004, according to GM's 2004 10K report.
