General Motors' Stock Skids to 1950s Level

July 1, 2008
Company's days on Dow Jones index could be numbered, say analysts.

General Motors Corp.'s stock price fell on June 30 to levels last seen in 1954, as investors fretted over its falling sales, and as some analysts wondered if the iconic U.S. automaker's glory days are in the rearview mirror.

Analysts are questioning if GM will be able to remain a component of the benchmark Dow Jones Industrial Average stock barometer, which groups some of the United States' biggest industrial groups.

The Detroit-based auto giant, which is due to unveil its June sales tally on July 1, joined the index of leading stocks on August 31, 1925.

But analysts say its falling sales and troubled finances could put it at risk of being ejected from the index after decades of membership.

Industry analysts say GM's demise had been triggered for two reasons: rocketing crude oil prices and because consumers are turning away from pickups and other gasoline-guzzling vehicles that the auto-maker rolls off its production lines.

GM's shares hit a record high of $93.62 on April 24, 2000, but fell at one point June 30 to $11.12, marking its lowest level in over half-a-century. Its shares subsequently closed down slightly at $11.50.

Since the beginning of June, GM's share price has tumbled over 35%.

"The situation is very serious for GM," says Rebecca Lindland, an automotive analyst at Global Insight.

She said U.S. automakers partly have an image problem as consumers think they only produce big vehicles, such as sport utility vehicles and trucks.

The combined market worth of U.S. automakers ranks in the billions of dollars, but plummeting sales and related financial problems have made them vulnerable to potential takeovers, analysts say.

Some analysts point out that GM's debt mountain, of around $16 billion, could, however, put off possible corporate suitors seeking to acquire a big U.S. automaker.

Potential suitors may also be wary of GM being potentially downgraded from the Dow Jones index, as such a move could make fresh financing harder to win.

Analysts say GM could issue new shares to help bolster its finances, although such a move would be likely to dilute the holdings of existing shareholders.

"GM has to raise capital, that is the problem. GM has to cut the dividend and raise capital, ultimately that is what they will be forced to do, to sell equities and cut the dividend," says Mace Blicksilver of Marblehead Asset Management.

Any capitalization plan could run afoul of cash-strapped banks, however, who are facing their own losses from the sharp downturn in the U.S. housing market.

"Cash is very limited for everybody and when you couple the very tight credit (squeeze) and combined with very poor automotive sales, then it just aggravates the difficult situation," Lindland says.

If the credit crisis, which has made it much harder for American consumers to get car loans and credit from stressed banks, continues, GM's place in the Dow could be in danger, analysts say.

"GM is the weakest member of the Dow Jones" index, says Blicksilver.

Blicksilver said, however, that there will be tremendous political and psychological pressure to keep GM, one of America's best-known companies, ranked in the Dow.

Lindland said GM's management might still be able to turn the automaker's fortunes around.

"They are still a huge company, if they are able to cut costs significantly and able to respond more quickly to consumers' preferences, then they will be okay," she says.

After GM, the smallest company ranked in the Dow is aluminum group Alcoa which has a market worth of around $29 billion, almost five times GM's worth of over $6 billion.

Asked about possible index changes, a spokeswoman for the Dow Jones Indexes says: "We do not speculate or comment on composition changes to the Dow Jones Industrial Average."

Copyright Agence France-Presse, 2008

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