Debt Rating Companies Worry About Auto Industy, Again

The new cost cuts at GM (GM) and Ford (F) are not going to help them with their debt service. Cash flow will be hurt by a combination of lower US car sales and the money borrowed to set up health funds to be run by the UAW. According to Reuters "Ford and GM will have to service this debt with dramatically lower earnings capacity — a result of (market) share losses and downsized production capacity" and other factors, Fitch said.

Fitch sees sales next year falling by 3%, but some estimates put that number as high as 10% if the economy is badly crippled by high fuel costs and falling home prices.

All of that means that the drop in car company stocks to near their multi-year lows will not change over the next couple of years. Ford’s shares are at $6.97. Even during its worst days over the last five years shares bottomed at $6.06.

There is really no chance that domestic car sales for the Big Three will get any better in the near future. They have new cars, many of which are popular, but the sales tide is going out. Foreign sales are doing well, but they are not large enough to offset problems at home.

Bad times for Detroit.

Douglas A. McIntyre