Market conditions have recently looked promising for investors looking to get into a blue chip stock at deeply discounted rates. GM stock took a massive beating last week, closing at a 50 year low of $4.89 on October 10th. Forecasts portraying the future sales automobiles show a significant decline in sales due to the difficulties for consumers to obtain credit for purchase. Incentives by the auto industry have increased demand, but the problem of credit remains. While panic gripped the exchange last week, this morning seems to be showing a bit of that silver lining. The larger question to ask is: Is now the right time to jump into GM?
Speaking on condition of anonymity, executives at GM and Chrysler have both indicated that the market is ripe for such a consolidation. Auto manufacturers such as GM, Chrysler, and Ford could benefit from such a merger. Decreased costs would cut billions from the bottom line. A merger would also yield an increased network for sales which brings the best of both worlds to each of the participants. Combining engine and transmission development and production alone could save $10 billion to $20 billion a year and possibly $500 to $1,000 per car, say some industry insiders. The executives who confirmed the talks between GM and Chrysler said negotiations, which began in August, have been tabled until the financial markets calm down. “Talks will pick up again,” said one high-ranking executive.
GM and Ford have also had discussions about a merger or formal tie-up in the last two years as well, according to executives with knowledge of those discussions. But the talks, the same executives said, have not gotten very far. Ford, which is also worried about cash, is in talks to sell its stake in Mazda Motor to enhance its liquidity. Seems that all possible participants, Ford, GM, and Chrysler, are in a liquidity bind. Credit rating agency Fitch Ratings issued a report expressing concern that GM and Ford Motor won’t have enough cash to last through 2009 if sales continue to fall. On Friday, GM issued a statement denying that it’s considering any sort of Chapter 11 protection.
If a merger were to take place between the two auto industry giants for the sake of survival, the restructure would be immense. The GM brand would have to take measures such as layoffs, plant closings, and dealership shutdowns; which would all be necessary to ensure the entire structure as a whole doesn’t collapse.
So, is it the right time to jump in while the stock is under such pressure? In this writer’s opinion – Not quite yet. Wait until the third-quarter earnings report comes out later this month to check out their current standing. If you can tolerate some higher levels of risk for a short term gain, then I’d say now would be the time to put the stock on radar to potentially enjoy a nice bounce-back from the 50-year low. But keep a weathered eye on it if you invest and set stop-losses to protect yourself.
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