NEW YORK (CNN/Money) -
General Motors Corp. warned Wednesday that it expects a big loss in the first quarter due to sluggish sales and stiff competition in North America -- news that shocked Wall Street and sent its stock tumbling nearly 14 percent to a 12-1/2-year low.
GM CEO Rick Wagoner, referring to North America as the "800-pound gorilla," told reporters and analysts that it was vital to "get that business right. If we don't, then our bottom line suffers because of our fixed costs."
Wagoner said that cash-back incentives, long effective for selling cars and sport/utility vehicles, have "cooled off," noting GM needs to do a better job selling its new cars and light trucks with a more focused advertising strategy.
Citing weakness as well in sales of its highly profitable SUVs, GM forecast a loss about $1.50 a share for the quarter, excluding special items, versus its previous target of break even or better. Analysts, on average, had been forecasting a loss of 3 cents a share, according to Thomson First Call.
GM (Research) stock sank as low as $29.00, its lowest level since October 1992, a year when GM lost $23.2 billion and nearly went bankrupt.
Shares edged higher in after-hours electronic trading on INET, but its precipitous fall dragged other automakers and the broader market down with it during active trading Wednesday.
Ford Motor (Research) stock ended down 2.6 percent on the New York Stock Exchange, while DaimlerChrysler (Research) fell about 2 percent. The Dow Jones industrial average ended the day down about 112 points, or 1 percent, at 10,633.07.
GM's dominant position in its key U.S. market has fallen to less than a 25 percent share on a steady loss to foreign automakers, spurred Standard & Poor's to caution that it could downgrade the company's debt to "junk" status at any time, which would likely raise its borrowing costs.
Standard & Poor's revised its outlook for GM to "negative" from "stable," saying in a note that the downgrade reflects "heightened concerns regarding the profit potential of the company's core North American automotive business" in the wake of the warning. GM currently has $300 billion in total consolidated debt.
For the year, GM expects to earn a profit of $1 to $2 a share, excluding special items, down from its previous target of $4 to $5 a share. That compares with analysts' current consensus estimate of $1.11 a share for the year.
The company said that its previous first-quarter earnings guidance was based on North American vehicle-production volume of 1.25 million. Since then, that target has been reduced by about 70,000 vehicles.
"We are not that surprised that the company guided down for the first quarter given their previously announced weak production schedules," J.P. Morgan analyst Himanshu Patel wrote in a note to clients. "However, we are surprised by the magnitude of the first-quarter and 2005 revision, which suggests the further risk to production schedules in future periods."
In a conference call Wednesday morning, GM executives indicated further production cuts would come in the second quarter.
U.S. automakers have been plagued with bloated inventory early in 2005. GM and Ford recently reported big declines for many mid- and full-sized SUVs last month -- the most profitable part of the product mix.
At the same time, Wagoner added that GM's other automotive businesses, as well as its financing unit, were "running in line with, or ahead of, our expectations."
Noting that car sales are showing strength as gasoline prices have risen, denting SUV sales, GM said it plans to beef up its marketing support for core new vehicles this year, including the Chevrolet HHR, Monte Carlo and Impala; the Pontiac Solstice, Torrent and G6 coupe and the Cadillac DTS. It also noted said it would push its new Hummer 3.
"GM's new products are just not getting the job done and the company is losing market share," said Kevin Tynan, analyst with Argus Research. "It's really a combination of three things going on. There's lower sales mixed with falling prices and higher input costs."
"The only positive spin on the situation is that GM said it will maintain capital expenditure at $8 billion for the year," Tynan added. "This means that the shortfall will not affect product development. That's what analysts look at. If the new product portfolio suffers, that will be a huge mistake and one that will really batter GM's stock."
Confronting the 800-pound gorilla
On the call, Wagoner noted the reasons for the change in GM's outlook.
"High inventory combined with rising interest rates and a modest outlook for the auto industry made it apparent that we needed to address our own outlook right away," he said.
GM did not outline any time frame for when its expects business to turn around in North America but did indicate that it expects March auto sales to improve from February, adding that inventories at the end of the quarter are expected to be below a year ago.
John Devine, GM's chief financial officer, said the tough pricing environment means the automaker must seek ways to cut costs.
"While we have made good progress in reducing costs over the last several years, the projected loss in North America reinforces our need to do much more, particularly in the area of healthcare," Devine said. "Healthcare has been an increasing drag on North American profits and it's made us vulnerable to profit shortfalls."
GM's U.S. sales tumbled more than 6 percent during the first two months this year, and its U.S. market share fell to a record low of about 24.4 percent in February despite high incentives.
David Cole, director of the Center for Automotive Research, said he expects similar difficulties for other companies in the automotive industry. "This will not be the only company where you're going to see this kind of comment," he said.
Ford, which has also lost U.S. market share this year, said Wednesday that it expects its profit for this year to be at the lower end of its previous forecast for earnings per share of $1.75 to $1.95, excluding any special items.