…according to Deutsche Bank analyst Rod Lache, who has just slashed his target price on what is still the world’s biggest car maker to $0 and advised clients to get out.
He thinks GM will not be able to fund its operations beyond the end of next month and the inevitable government bailout will leave shareholders with nothing.
And the bad news does not end there. Mr Lache reckons suppliers to the US auto industry also face “unprecedented distress”.
Cash loss acceleration at GM leaves it with few options.
At this point, without external government intervention, our work shows GM may not be able to fund its U.S. operations beyond December. Even if GM’s suppliers do not change the company’s commercial payment terms, GM’s U.S. cash position will likely decline to less than $5 bn by late December, and we believe that this level could be overwhelmed by payables coming due in early January.
But we anticipate government intervention GM has already engaged members of Congress, and the current Administration, in seeking its only option for survival:
An immediate capital infusion or loan. We believe that the U.S. will be compelled to participate. Without government assistance, we believe that GM’s collapse would be inevitable, and that it would precipitate systemic risk that would be difficult to overcome for automakers, suppliers, retailers, and sectors of the U.S. economy. A recent study by the Center For Automotive research projected an immediate loss of over 2.5 MM jobs, and a $125 bn decline in personal income from such a scenario.
A government bailout not likely to help shares; lowering GM to Sell (PT zero)
Even if GM succeeds in averting a bankruptcy, we believe that the company’s future path is likely to be bankruptcy-like. We believe that the U.S. may ultimately need to provide GM with at least $10 bn in loans to keep the company afloat through 2009/2010, and potentially as much as $25 bn to fund GM’s cash burn and restructuring. While we believe that that GM’s secured creditors may get a par recovery, unsecured creditors may get very low recovery. Equity shareholders are unlikely to get anything. We are lowering our target on GM equity to $0.
Near term challenges, longer term opportunities
0ur conclusion The near term outlook for nearly all automakers and suppliers is negative. Demand is likely to decline further, particularly for the Big Three. We also anticipate unprecedented distress within the interconnected network of Tier II manufacturers. Longer term implications are mixed. Suppliers such as Lear, American Axle, and Magna, disproportionately Big 3 focused, face major risks. BorgWarner, Autoliv, JCI, AutoNation and Asbury may benefit in the long run.
Related link:
GM warns of cash shortage - FT
