NEW YORK (CNN/Money) -
The bill may be coming due soon for the zero-interest financing party that Detroit has been throwing for the last year.
When General Motors Corp. reports third-quarter results Tuesday, and No. 2 Ford Motor Co. joins in Wednesday, they will show strong sales and revenue in the just completed period, coupled with fourth-quarter production plans expected to be above year-earlier levels.
But analysts have been souring on the automakers even as consumers embrace their popular incentive packages. And the year-to-year sales comparisons will be very difficult, if not impossible, to top starting in the fourth quarter, when they'll be matched against the white-hot record sales following the first broad introduction of zero-interest financing in the wake of the Sept. 11 attack.
"While price-cutting has sustained the [sales rate] at the expense of margins, eventually either the [automakers'] capacity to support the market will diminish, and/or consumer demand will contract on its own as it has in other cycles," Merrill Lynch auto analyst John Casesa wrote in a note to clients Monday. In the same note he downgraded both GM and Ford to a "neutral" rating from a "buy" recommendation.
Casesa's downgrades helped send shares of GM (GM: down $1.56 to $33.26, Research, Estimates) and Ford (F: down $0.39 to $7.93, Research, Estimates) sharply lower Monday.
Besides the downgrade and concerns about the incentives, GM also is dogged by the Federal Communications Commission's move last week to block the proposed sale of its Hughes Electronics (GMH: down $0.24 to $8.52, Research, Estimates) unit to competing satellite television operator Echostar Communications (DISH: down $0.39 to $16.89, Research, Estimates). Hughes Monday reported a smaller third-quarter loss than a year earlier.
Analysts have expressed concern about the underfunding of both GM's and Ford's pension plans, which could require cash contributions and lead to reduced earnings due to stock market declines of the last two years.
Officials of the automakers defend the incentives, saying that some form of inducement is always necessary to get customers into dealers' showrooms. But it will continue to put pressure on profits and pricing if the automakers intend to keep factories humming.
"Whatever level of incentives you start out at the beginning of model year, it rarely gets less expensive; it generally gets more expensive," said George Pipas, Ford's head of sales reporting and analysis.
Casesa's report estimates that automakers' average incentive costs have gone from just under $1,500 per vehicle at the beginning of 1999 to just over $1,900 today. Pipas says the impact of the incentives on consumers probably is waning, which is another challenge to maintaining sales.
"The level of offers out there today are very similar to the offers out there in October of last year, post 9/11," Pipas said. "Last year it generated the best month in industry history. That same level of program will not come close to generating the same volumes this October."
Ford and GM are in much different positions in the market today, with GM showing strong sales gains while Ford fights to rebound from its first annual loss in almost a decade last year.
Analysts surveyed by earnings tracker First Call expect GM to report improved earnings per share of 99 cents excluding special items, up from EPS of 85 cents a year earlier.
Of almost equal interest as the third-quarter results will be GM's new guidance for the year. The company seems well positioned to reach its guidance for 2002 EPS of $5.60 that it gave when it reported second quarter results. That was below First Call's forecast at the time, and analysts have raised their estimates even farther beyond the guidance in the three months since. The consensus EPS forecast now stands at $6.31, nearly double the $3.23 GM earned a year earlier.
Meanwhile analysts are looking for Ford to barely do better than break even with a consensus forecast of 3 cents, and a range of EPS estimates from 1 to 5 cents. But that will be a marked improvement from the 28 cents a share loss it reported in the third quarter of 2001.
Casesa said problems for the sector are not restricted to GM and Ford. He also downgraded two major suppliers -- former GM parts unit Delphi Corp. (DPH: down $0.51 to $7.01, Research, Estimates) and Dana Corp. (DCN: down $0.55 to $9.86, Research, Estimates)
"Even if the stocks experience a reactionary bounce, the same questions about fundamental outlook will need to be answered next week or the week after," he wrote about all four companies.
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Casesa said the only thing that can answer the industry's fundamental problems is improved pricing on a sustained basis. But he added, "We think it would take a rapid acceleration in economic growth and/or sharp capacity reduction, both of which appear unlikely."
Casesa did give favorable comment to American Axle and Manufacturing (AXL: down $1.14 to $21.24, Research, Estimates), Lear Corp. (LEA: down $0.98 to $35.61, Research, Estimates) and Magna International (MGA: down $1.70 to $50.46, Research, Estimates), all of which he said have good growth prospects and attractive share prices at current levels.
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