GM shares plunge on bankruptcy fears

By Charley Blaine

General Motors (GM, news, msgs) shares slumped below $10 today -- a level not seen since September 1954 -- after an analyst suggested that slumping sales may force the automaker to seek bankruptcy protection.

The plunge is an astonishing moment in the history of the nation's largest automaker -- once so powerful that many people believed that, as the late GM president Charles Wilson was incorrectly quoted as saying in 1953: "What's good for General Motors is good for the country."

GM's slump helped the Dow Jones industrials fall nearly 167 points today and the overall stock market dip into bear-market territory after crude oil hit a new closing high of $143.57, up $2.60 from Tuesday.

Merrill Lynch analyst John Murphy said GM needed to raise up to $15 billion in new capital to get through 2008 and 2009. The company insisted it had enough to cash to get through 2008 and could sell assets and make other moves in 2009.

GM closed down 15.1% to $9.98. Shares of all automakers plus automobile parts makers and tire makers also fell.

Bankruptcy is "not impossible" if the U.S. auto market continues to slump, Murphy wrote. A GM bankruptcy would put all labor contracts at risk and take years to resolve and could cause problems for thousands of suppliers.

• Top Stocks blog: GM sales up everywhere but here

IS GM too big?

There was extreme skepticism that bankruptcy would ever happen. The company is too big and important to the domestic economy, and investors, management and, ultimately, the federal government would probably get involved first.

GM has about 280,000 employees worldwide, with 140,000 in the United States.

Murphy cut GM to "underperform" from "buy" and lowered his price target for the largest U.S. automaker to $7 a share.

He also lowered his forecast for 2008 U.S. industrywide light vehicle sales for the third time this year and said the recent drastic decline in sales would likely to continue through 2009. He expects 14.3 million U.S. auto sales this year and 14 million units for next year, down from 16.15 million units in 2007.

• Video: Check out videos on General Motors' woes 

Murphy lauded GM's vast restructuring strides but said three factors have combined to dwarf the company's best efforts:

• GM needs for more capital to cope with slumping sales. Every drop of 1 million units in U.S. auto sales on an annualized basis means a loss of $3 billion in revenue for GM. "The financing necessary for the next two years is likely to be larger and more expensive than recognized," he wrote.

• Weak sales will continue through 2009. The industry faces "a more severe downturn than even the most bearish industry observers expected," he wrote. Murphy lowered his earlier target of 14.8 million light vehicle sales in 2008 by half a million units.

• GM's sport-utility-vehicle segment is on the verge of becoming obsolete, eating away at the company's profit potential, he said.

On Tuesday, GM surprised investors with a June sales report that wasn't nearly as bad as feared and sparked a dramatic recovery for the U.S. stock market. The stock was up more than 15% at one point before fading to a 2.3% gain.

But sales overall have fallen to 15-year lows as high gas prices are causing buyers to shun gas-guzzling trucks and SUVs (not to mention the Hummer business that GM is trying to sell) for more fuel-efficient vehicles.

The national average price of gasoline was $4.092 a gallon, AAA's Fuel Gauge Survey showed today, up from $4.087 Tuesday and up 39% from a year ago.

• Top Stocks blog: A lesson for GM and Ford: Chrysler cuts its throat

A bigger estimate of cash needs

Although analysts have said GM will need to raise capital to cover continued losses before 2010, $15 billion is a higher estimate than any other analysts have suggested. Murphy insisted the number is realistic because of the possibility his estimates of industry sales declines might be too low.

Further, GM is being forced to use much of its cash to finance incentives to get customers to buy cars.

But analyst Shelly Lombard of Gimme Credit told The Wall Street Journal today that, while GM may need additional liquidity, some of the fund-raising required may just be cash for an "emotional security blanket" to assuage investors' anxiety.

GM could secure some of its more profitable international operations to issue debt against.

• Top Stocks blog: Ford shareholders want out

In its most recent earnings report, GM's pretax earnings from international results -- helped by growth in Asia and Latin America -- nearly doubled to $1 billion, while its pretax losses in North America quadrupled to $812 million.

Rivals' stocks all move lower

The woes for GM's stock also hurt shares of its rivals. Ford Motor (F, news, msgs) was down 7.4% to $4.36. Toyota Motor (TM, news, msgs) was off 2.4% to $91.40. Honda Motor (HMC, news, msgs) was down 2.2% to $33.29, and Nissan (NSANY, news, msgs) was off 3% to $15.80.

In addition, Visteon (VC, news, msgs), which makes climate-control systems used by most major automakers, was down 16.7% to $2.19. ArvinMeritor (ARM, news, msgs), which makes components such as brake systems and axle and drivelines, was off 9.2% to $11.21. Goodyear (GT, news, msgs) was down 2.7% to $17.55

Values of GM bonds were also falling, and yields soared. The yield on a bond due in July 2033 with a coupon -- or stated -- rate of 8.375% was up to 15.3% this afternoon, according to TRACE, the market-tracking service of the Financial Industry Regulatory Authority. That translates into a price of about $55.70 per $100 in face amount, down from about $95 in October.

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The health of the Big Three American car makers has long been in doubt, with many openly questioning whether they can be viable concerns in even the near future. But many analysts have been most pessimistic about Chrysler, which was acquired by Cerberus Capital Management last summer.