NEW YORK -- In the credit world these days, it's hard to be skeptical about U.S. automakers when their bonds and credit spreads have helped lead the historically big rally of the past 10 months.
General Motors said on Tuesday it lost money on continuing auto operations, but that did little to stop the cheering that its results bested expectations. Much of the help came again from something that has nothing to do with automobiles -- its finance unit's mortgage and insurance business.
Investors mostly yawned at the news, with GM's stock slipping lower and the company's credit spreads losing their initial improvement on rumors of a coming debt issue. But most credit derivative traders see little stopping the rally in the credit spreads of GM and its finance unit, GMAC.
GM reported adjusted fourth-quarter net earnings of $1.01 billion compared with $1.02 billion a year ago. Global auto operations lost $167 million, including charges from a new U.S. labor contract and restructuring in Europe. Excluding those charges, auto profit stood at $396 million. Still, almost all global units struggled except for the Asia Pacific region.
After skimming through the dense tangle of tables and adjustments in in General Motors' earnings statement, some analysts said the figures revealed one thing: the giant automaker is still having a tough time fending off foreign rivals and fighting to hold onto market share.
"We see an automotive company struggling to compete," said Doug Williams, director of credit research at Evergreen Investments, which manages about $250 billion of both fixed-income and equity assets.
Williams noted GM's earnings "were so confusing it will take a day to figure out what their real earnings were and whether they're stronger now than they were a year ago."
Certainly some of the news was not so rosy. Despite the big rebates and other incentives, GM's overall market share shrank in 2003 to 28 percent from 28.3 percent, breaking two years of gains. That compares to an all-time market share low of 27.8 percent in 2000.
One analyst said it seemed GM was able to help bolster its market share in part by chasing after the low-margin business of fleet sales, such as sales to car rental companies.
As for profit margins, on an adjusted basis they shrank to a meager 1.7 percent compared to 2 percent in 2002. GM did point out that it generated more than $32 billion in cash. But with some of that cash coming via last year's $17 billion debt sale, one analyst likened it to taking a cash withdrawal on a credit card.
Another credit analyst at a U.S. investment bank said GM's results compared to the prior year were "not that favorable, honestly, but they did better than expectations." The analyst has an overweight call on GM's corporate bonds because "they've got credibility and gave you a pretty rosy 2004 forecast."
The markets quickly seized on the news as upbeat. The credit default swap spreads of General Motors Acceptance Corp., the finance arm with most of the company's outstanding debt, tightened as low as 106 basis points. That means it would cost about $106,000 a year for default protection.
But after rumors swirled GM might sell more debt -- even after a blockbuster bond sale last year to help pay for its pension deficit -- the spreads pushed out to around 117 basis points, traders said.
Even if General Motors does sell more debt, the current market conditions likely mean "people would gobble up these bonds and that would cause spreads in the secondary market to tighten," one default swaps trader said. The trader described Tuesday's spread widening as "overdone."
With GM being such a large issuer, and with its credit spreads still attractive compared to other investment-grade companies, few investors and speculators can afford not to hold General Motors as a credit, be it bonds or derivatives.
Evergreen's Williams said he preferred the bonds of GM to Ford, but was not a long-term investor in General Motors.
"Yes, they have huge cash balances, they're surviving," Williams said of GM. "We don't look at them as a long-term investment opportunity. We stick to the shorter-dated maturities and closely follow their cash burn rate."
"If they can at least break even on a cash flow basis and fund their capital expenditure requirements, fund their R&D and fund any pension deficits, which hopefully are behind them, then we'll buy into it. But I'm not buying a lot of long GM paper right now," he said.