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An auto industry stuck in neutral

AllPennyStocks.com, AllPennyStocks.com
0 Comments| January 18, 2009

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Trust at its controls takes us out of childhood, and confers upon us adult responsibility. It gets us from A to B and back, and brings us status when it does. We wash it, polish it, tune it up, show it off, make payments on it, make out in it, treasure and value it. In short, the car drives the economy. In the depths of the 1930s Depression, the cowboy philosopher Will Rogers remarked on the irony of the situation by calling America “the first nation in the history of the world to go to the poorhouse in an automobile.”

It is an irony worthy of Rogers and other commentators that equity markets at the beginning of 2009 are in a diseased state and that one of the most chronic patients is the auto sector. As the U.S. economy, the world’s largest, contracts in 2009, analysts project car sales to fall to between 10 million and 10.5 million from 13.2 million in 2008. With jobs vanishing hither and yon, and fewer and fewer consumers having enough bucks in their jeans to buy cars, U.S. auto sales dropped 18% in 2008, pushing General Motors Corp. (NYSE: GM, Stock Forum) and Chrysler LLC -- controlled by private equity firm Cerberus Capital Management LP -- to the brink of collapse.

What were the odds in more flush times that two of the former “Big Three” automakers would flounder to the status of “penny stocks”, under the definition established by the Securities and Exchanges Commission (SEC).

Only five years ago, a single share for the former behemoth known as the Ford Motor Company (NYSE: F, Stock Forum) still cost investors more than $15 (all figures in U.S. funds unless stated otherwise). Scant weeks ago, that same share commanded only $1.01. Founding father Henry Ford would roll in his grave. GM’s stock price fell like a leaf last autumn to $1.70 after enjoying life above the $29 mark as recently as last February, a decline unbecoming what was once the world’s biggest company.

Who’d have thought that these engines of American progress would be revealed as the sick men of the economy, to the point where members of Congress would have to forsake party differences and cobble together a bailout package, to get the economy moving and restore America’s faith in itself?

The figures should alert small cap watchers who heretofore thought such equities as F and GM too rich for their blood. If the steps taken by the companies succeed in making the bailout work, get their plants functioning again, and thus take the companies’ prices out of the realm of penny stocks by the time the snow melts, bargain hunters may pat themselves on the back for buying when other investors headed for the hills.

Making the bailout a success is a matter of some urgency; literally millions of jobs are at stake, from the folks on the assembly lines, to the parts factories, the fuel industries, road building, and other areas of the economy inter-connected by the auto sector.

Canada followed in December with a similar bailout of GM, Ford and Chrysler, to help give Ontario’s economy a shot in the arm. Ontario, the alpha-dog of the Canadian economy, has suffered of late, mostly at the hands of the ailing auto sector. Prime Minister Stephen Harper’s package totaled $3.4 billion Canadian to help save as many of the 400,000 Ontario jobs that could otherwise be in jeopardy.

Nor are the companies who dominate the industry immune. Toyota Motor Company in February and March will shut down its Japanese plants for 11 days, after posting its first operating loss in seven decades.

To those viewing the packages as a panacea, a word of warning; the cash comes with enough strings attached to assemble a tennis racket. GM and Chrysler have to cut payroll costs – not only on the shop floor, but in the boardrooms – and negotiate with bondholders to lower their debt substantially. GM recently received $9.4 billion in U.S. federal loans and could get another $4 billion if it succeeds, but has until Feb. 17 to get its act together.

Time is of the essence. General Motors CEO Rick Wagoner told the New York Times and Wall Street Journal in mid-January a Chapter 11 filing could be in the cards for later this year if things don’t improve. Wagoner said the long-term viability of GM is “not 100-per-cent certain”, but also expressed confidence bankruptcy could be avoided.

Ford, on the other hand, is putting on its best version of a brave face, suggesting it intends to forge ahead and not use the line of credit it had requested from Capitol Hill, despite an ongoing slump in auto sales. Chairman Bill Ford told reporters at the Detroit Auto Show in mid-January his company has sufficient cash to keep going on its own. Ford has been seen by analysts as better placed to weather the latest economic storm because it borrowed more than $23 billion in 2006 to fund its turnaround, loans that were secured against most of the company's assets.

One loud knock against the North American auto industry - a defect its counterparts in Asia and Europe have successfully exploited – is its tardiness in embracing the trend toward environment-friendly cars. Toyota and Nissan have led the way in making and bringing to market hybrid cars using a combination of electricity- and gasoline-powered engines. Only lately have North American manufacturers followed suit. Ford earlier this month joined with Ontario-based parts supplier Magna International, to introduce a zero-emission lithium-ion battery electric vehicle (BEV) to be delivered to market in 2011.

But that’s planning for a day seemingly far off in the future. Things have to get shaking now for the sector to revive. To spark sales, GM began a “Red Tag” sale last November, 10 days earlier than it normally would. The same month, Ford began offering buyers employee discounts, and Toyota introduced no-interest loans in October on more than half its models. In Japan, Toyota middle managers began doing their bit in early January by engaging in a voluntary corporate plan to buy the company’s cars, and taking a 10-per-cent pay cut to reduce red ink.

Making a decision about whether to buy into two publicly-traded companies that have seen better days will require daily vigilance for small-cap investors. The next few weeks are critical to the sector that still drives our economy; it’s partly a function of getting employees from the top down to swallow the tough medicine prescribed by lawmakers, and to get them driving the car in the right direction.

Read more Stockhouse articles by AllPennyStocks.com



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