Through TheFly's Eyes: General Motors Corporation
from Theflyonthewall.com





American auto maker General Motors (GM), often referred to as "beleaguered," is in the news again with more financial issues. The company announced yesterday that it has restated its financial results and those of its GMAC unit back to 2000. This additional noise comes after reports of other financial issues, additional job cuts and a possible sale of the company’s profitable General Motors Acceptance Corp (GMAC) unit. Additionally, General Motors is locked in a three way labor battle with its former parts division, Delphi, and the United Auto Workers union.

Brokerage firms cannot agree what to rate General Motors nor what the most important catalyst is for the company. JP Morgan Chase, which rates GM an Overweight, notes that GM feels a GMAC sale “is a complex endeavor” but is “working to finalize a transaction as rapidly as they can,” which JP Morgan feels may create some investor concerns. The firm is confident a sale of the unit is achievable, however. Lehman Brothers, which rates GM an Equal Weight, is focused on the strife between Delphi and the UAW. They believe GM will eventually have to intervene to resolve the labor dispute, which could drag on for some time. Soleil Securities, which rates GM a Sell, is not focused on the company’s finances or labor, but on its product line. The firm believes the launch of the GMT900 full size SUV class is poorly timed as consumers are moving away from the SUV segment.

The result of all this? Shares of General Motors (GM) dropped about $1 to $21.70 in mid-day trading. These new financial issues will not help GM’s “junk” credit rating – a rating that will hamper the company’s turnaround effort, due to the higher interest rate associated with the sub-par rating. This is exactly the type of additional hurdle GM does not need, with the company already facing a likely fleet revision, due to the declining popularity of low-mpg SUVs, and increased competition from lower-cost and higher-mpg imports.

However, GM’s news did not spur a sell-off among the other major automakers: Ford (F) was up about 10c to $8.20, Daimler Chrysler (DCX) was up a $1.10 to $56.55, and Toyota (TM) was up 85c to $108.35. The initial Wall Street consensus Wednesday appears to be that while Ford faces the same SUV-fleet issues and structural costs as GM, so far Ford’s financial status is not as serious. (With the emphasis on “so far.”) Further, Daimler Chrysler, with slightly lower structural costs than GM and Ford, appears to be better-positioned to weather the domestic auto sector’s transition period – a period when lower cost, better-product foreign auto makers, such as Toyota and Nissan (NSANY), are likely to gain even more market share. Wall Street is united on the seriousness of GM’s situation: what Wall Street is divided on is whether GM can implement the major structural changes necessary, and quickly enough, to spark a sales turnaround in the years ahead. The record shows that GM has done it before, but as of late March 2006, few on Wall Street are willing to venture that GM will be able to do it again.

Our Options strategist notes that General Motors’ option implied volatility of 50 is at the low end of its 26- week range which suggests decreasing price risk.

Our Technical analyst points out that General Motor’s stock has been the worst performer of the Dow 30 stocks over the past year having lost greater than 60% of its value at its recent low.

Technically the stock's downward momentum (its rate of change) has slowed and the stock has found something of a bottom at the $18-$19 area. It is also trading in a very narrow ranged channel (bullish, began in early March) which until today looked set to break out and form a complete double bottom. That is, that the price chart over the last six months would resemble a "W" shape. For a true double bottom to be in place we'd want to see price above the apex of the middle of that "W", in this case above $25 dollars. Right now the stock is at its channel low. A breakdown through the lower limit at $21.68 (bottom today) of the channel would be very bearish. The downside objectives in that case would be at the following support levels: $21.63, $20.73, $19.81, $19.02, $18.47. If the stock can stay above the channel, the following are resistance areas which become upside objectives in a rally: $21.94, $22.31, $22.78, $23.06, $23.56.

Another bearish factor is that we could interpret the current pattern as a bearish continuation triangle (see chart below). This triangle would suggest a downside target to the $13 area which would be a new all-time low for the stock. That pattern would not be valid unless the stock breaks down below $20 sometime in the next several days. The chart shows the boundaries over time where the pattern is still valid (stock price stays within triangle bounds) and where the "break" line is (dashed green line) as well as the possible downside target area.

Chart created with Equis MetaStock