S&P Cuts GM (GM): Too Late As Bush Talks Chapter 11

Credit rating agencies and stock analysts have the habit of stating the obvious after the obvious is obvious to everyone else.

S&P cut its price target on GM (GM) today. A bit later, the Bush administration said an "orderly bankruptcy" might be the best way to solve the Detroit crisis.

According to MarketWatch, "Standard & Poor’s Equity Research reiterated its sell rating on the stock and more than doubled its loss projection for 2009 to $23.17 a share. S&P also cut its target price on GM’s stock by a third to $2 a share."

With a few hours, the AP reported that with Detroit anxiously holding its breath and waiting for federal help, White House press secretary Dana Perino said, "There’s an orderly way to do bankruptcies that provides for more of a soft landing. I think that’s what we would be talking about."

The chances are becoming overwhelming that GM will have to file for bankruptcy, hopefully Chapter 11 and not Chapter 7. While the administration says it will loan the car company money, no agreement has been formalized. Part of a package may well include appointing a car czar who can force the firm into Chapter 11 if GM cannot come up with an adequate restructuring plan by March 31.

There is still no guarantee that creditors, the UAW, or suppliers are willing to give up much to save GM, especially once they see federal money starting to move into the company’s bank account. Each group may gamble that the new administration will view GM as "too big to fail". That may be a stupid gamble but the US car industry is obviously not filled with physics Ph.Ds.

GM is also up against another nearly insurmountable problem. There is no reason to believe that domestic car sales will recover next year. It is more likely that they will continue to fall and that GM’s share of a shrinking market could go under 20% as the Japanese pick up more business in the downturn.

GM is not worth $2 a share. Not by a long shot.

Douglas A. McIntyre