ZL1Vette

Any thoughts on this article? What do you guys think it means for convertible pricing in a few months, say a loaded convertible once production is saturated? Will the $7,500 rebate apply to Vettes ?

If This Is True...Corvettes For 20% Less !!

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This is from RealMoney.com, the pay site of TheStreet.com. I highly recommend it. Pete Eavis tends to be very bearish on the stock market and individual stocks, which has not helped him post-2002. However, I should point out that when the NASDAQ was 2,600 in late 2000, he said it was going below 1,500 down the line -- a call which looked ridiculous because most people though that the low 2,000's were supported by "The Greenspan Put."

Detox
GM Sputters Toward 2005 Breakdown
By Peter Eavis
Senior Columnist

General Motors (GM:NYSE) BEARISH
Price: $38.26 | 52-Week Range: $36.90-55.55
Easy money has kept GM's lending engine humming.
But delinquencies are creeping up, and revenue looks soft.
If a weak dollar pushes rates up quickly, watch out.


The biggest story of 2005 will be the sputtering breakdown of General Motors (GM:NYSE) , America's largest carmaker.

It's no secret that the Detroit behemoth has gotten through the past three years by using easy credit to sell cars and by making huge profits in its finance arm, General Motors Acceptance Corp., or GMAC. Yes, the auto business has improved. But on balance it remains a lemon, with the European operations lately burdening the company with hefty losses.

Now there are several signs that GMAC won't be able to take up the slack much longer. Without windfall profits from its finance business, GM could find itself earning as little as $4 a share next year, compared with analyst expectations of $5.15. The rating agencies, which have downgraded GM this year, could easily slap a junk credit rating on the company if GMAC stutters and the auto segment continues to suffer. With over $284 billion of debt, a junk rating would be a real blow.

Wednesday, GM's stock was up 5 cents to $38.23. On analysts' 2005 estimates, it's trading on a price-to-earnings ratio of 7.4 times, which looks extremely cheap. But management's failure to get its earnings forecasts right suggests that $5.15 might be hard to hit. Indeed, with a real pullback in the mortgage sector of the economy and drop in the auto lending business, earnings could slump at GM.
Unit Pricing Reversal

To understand GM's vulnerability, one first has to grasp the interplay between GMAC financing and the amount of cars GM sells.

Attractively priced GMAC loans have helped the company move a lot of cars over the past three years without having to reduce prices too much. The low rates ushered in by the Fed after the 9/11 attacks meant GM could lend to boost car sales, and the auto finance arm at GMAC profited from the explosion in lending. In the first nine months of 2004, GM earned $3.06 billion -- of which 75% came from GMAC.

(chart: not shown)

One statistic that led investors to believe this strategy was working was that revenue per vehicle sold in North America was climbing. This suggested to some that the crazy-seeming incentives weren't so crazy because they enabled the company to increase unit prices and thus maintain margins.

However, in the third quarter, North American per-unit vehicle revenue fell to $18,339 from $18,984 in the year-earlier period. That suggests that no matter what promotions are available, car buyers are really beginning to care more about price. And the fact that GM is now offering whopping $7,500 rebates on 2004 models suggests that GM managers understand that customers are growing more demanding on incentives.

As crazy as the rebates may be, they may do little to abet the unit-revenue drop, since interest rates are rising and pushing up the cost of loans.

Also worrying: Auto finance earnings are already taking a turn for the worse. In the third quarter, GMAC's auto finance earnings dropped nearly 20% from a year ago, to $259 million.

However, earnings from the mortgage lending business were up nearly the same amount in the third quarter, to $302 million. The likelihood of rises like that continuing are slim as interest rates rise. To be sure, higher rates will help increase the value of GMAC's large mortgage servicing business (by reducing the size of the reserve against impairment). But a drop in new mortgage volumes could more than offset a boost from the servicing business.
Demand Watch

GM insists that GMAC's earnings are sustainable at current levels, even though they're way up on precredit boom levels. GMAC made $2.8 billion in 2003, compared with 2001's $1.8 billion. The assumption is that steadily increasing interest rates won't damage the demand for mortgages and car loans too much, and that bad debts won't be a problem. Both assumptions are questionable.

Demand for new loans could be hurt if the Fed has to raise rates much more quickly than people think, and that might happen if the dollar continues to melt down. What's more, at some point individual borrowers are going to feel overburdened by debt. The lagging demand for "incentivized" car sales could be a clear sign that this is already happening, even though rates have not gone up that much. One of the biggest mistakes bullish analysts make is to underestimate the sensitivity of this highly leveraged economy to interest rate increases.

Bad debts could also be more of an issue for GMAC than GM's defenders allow. With low rates, debt repayments haven't been burdensome. But in the boom, there are some signs that GM may have become less choosy about who it lent to. GMAC's second-mortgage business is on the small size, but there are signs that delinquency rates on 2004 loans are already much higher than in previous years, according to data from GMAC loan pools. This shows up on loans called high loan-to-value (or LTV) mortgages, which simply means that the amount of money lent is more than the estimated collateral supposedly securing the loan.

After seven months, 1.48% of GMAC's high LTV loans were 30 days delinquent, according to data from the loans backing bonds issued in 2004. That's much higher than in previous years. The 2002 and 2003 loans were at 0.91% and 0.88%, respectively, after seven months.

To be sure, high LTVs are not a big part of GMAC's business. But again, the breakout in delinquencies at such an early stage suggests the company may have been scraping the bottom of the barrel. Investors should keep close tabs on other GMAC loans for credit quality problems, especially since lighter bad-loan provisioning has helped earnings at GMAC.

Finally, investors shouldn't have too much faith in the current GM management. It raised guidance for 2004 earnings in the middle of this year, only to cut it back after third-quarter earnings. Managers clearly had no idea how badly they were faring in the auto segment. Indeed, that miscalculation is minor compared with the forecast that the company would make $10 per share in 2005, a claim Detox immediately doubted.

In fact, the year GM aimed to be posting double-digit earnings could end up being the year that it finds itself struggling to stay on the road.

TedG

Why would GM lower the price if they sell each and every one they make. You drop the price on vehicles you can't sell. My advice, don't hold your breath.

ZL1Vette

I'm assuming there will be a glut...though the falling dollar (raising the price of imports).

Remember, there's alot of 2005 production coming on stream...if at some point folks say they'll buy a used C-5 or earlier or wait for the '06 models, it's Glutsville !

Corvette Junkie

Let's see they just raised the price of the C6 coupe a few weeks ago.

mdcruiser

TedG is exactly right here. If the dollar stays as weak as it has been (which is not at all certain, by the way), sales of the Vette in Europe will skyrocket. Sales in the US are not affected by the strength of our dollar overseas!

The C6 is one of those items that will NOT be discounted. GM is stuck with fixed costs on several nonprofitable lines that are too costly to shut down, and on those lines screaming bargains will be available.

But not on the C6. Anyway, the C6 is a screaming bargain at MSRP!

StanNH

Pretty unlikely. If dealer orders drop off, production cuts back. Also, the dollar is actually rising right now. In any case, overseas sales are a small part of Corvette sales. Buying a used car or waiting for the next year's production is hardly a new idea or unique to the Corvette. But, it's not even 2005 yet, so how can we be talking about waiting for the 2006? If you want a C6, why would you want to buy a used C5 or wait nearly another year for a 2006?

GM will not be giving any incentives on the C6 any time soon. Sales are solid and production is relatively imited...this doesn't add up to an incentive program.

Wafdof

First of all, don't believe everything you read. Just because your information comes from a pay site doesn't give it any more credibility than something written on a bathroom wall.

Second of all, where is this saturation happening? I would guess GM will slow down production before they let it happen to the C6 and there is no fear of that anytime in the near future.

Third, Vert prices are a premium and will stay that way, instead of making too many verts GM will make coupes, neat concept and it actually works.

I have to go with Ted says and agree that you heavily discount the cars that you are not selling and that have a great amount of competition. A Corvette C6 is neither of those two things.

jschindler

I don't have time to read the article fully (yeah, I'm actually quite busy at work today), but I skimmed it and didn't see a reference to the Corvette specifically. Are you reading this as just because it might effect GM across the board, that all vehicles (including the Corvette) will be affected the same?

JoesC5

The only reference on a $7500 rebate I saw in the subject article was on 2004 models(across the entire GM lineup). No mention of rebates on 2005 models. I doubt if GM will rebate any 2005 C6's, but the dealers will start/continue to discount to manage their inventories. How deep the discounts will go depends on how sales go next Spring/Summer when the demand for Verts will peak.

crabman

I thought I had read that demand was higher for all the vettes in the spring/summer?

70454

I posted on the C6 Sale section regarding Supplier Discount program and the 05' Vette is not only not included, but the financing is 5.9%. I built a fully loaded convertible (MSRP $63,195.00) and the supplier discount for this car (if it was available AND accepted by a willing dealer) was $55,917.46. First of all, GM is not offering a SD program on the 05' Vettes. Secondly, if they were, I would not be able to order one from a dealer because I would be competing against their allocation system where they're selling cars at MSRP and in some cases, above.

Unfortunately, I don't see major discounts on this car.

I suffer with all of you.

luvnmyDSOM

True, but this story was also on a couple of the major news networks this morning. As I saw it, rebates in the neighborhood of $7500 were only going to be offered to clear remaining 2004 stock, and even then I didn't take it to mean ALL 2004 vehicles.

As for the C6, I wouldn't hold my breath for rebates. Some areas are still selling them at MSRP (or above in a few limited availability areas), and all that other dealers have to do to start moving them is drop below MSRP. That will cut into the $5K - $6K markup, but the dealer will still do that and make some profit before orders slow down so much so that GM has to take a cut on their end with rebates.

luvnmyDSOM

This has been covered in many places in the forum, but actually, GM has no restriction against the corvette and GM supplier or GMS. Check their website at www.gmsupplierdiscount.com and look at the list. Only stipulation is that you agree to keep the car for 2 years (not sure how that's enforced).

As many others have said, the real issue is finding a dealer who will do it, and only a handful in the country will. I honestly don't understand why they would. I hear a dealer makes 2% - so let's say $1000 on a $50K corvette. They could easily make more than that by just discounting. If C6's were in unlimited supply, then it would make sense to just order one more and make a grand rather than make nothing. But there's not unlimited supply. Only thing I can guess is that a couple of these dealers have unused allocation they know there's NO WAY they'll move, so then it's back to the 'grand is better than nothing' theory.

I'm sure many will disagree with this, but I think it would have been better if GM had in fact made it simple for everyone by just saying it wasn't allowed on the C6 at all - at least for the first year or two.

Vette_DD

The price of a C6 coupe just went up $265 the first of November. That doesn't sound like there are going to be any incentives offered soon. Next spring/summer, maybe, but probably not before then.

ALL ST@R

we should all know by now the any rebates that GM is planning on offering are not applicable to the vette...the GMAC rates are higher...there will never be any cash back or anything.....

Just say to yourself, "what would i want GM to do?"...then whatever the opposite is will be your answer....LOL

catpat8000

I don't really have any way of knowing whether C6
sales are proceeding as well as dealers/GM would like
except for tracking stuff at my local dealer. He has had
13 C6s for sale for the past 3 weeks and in that time
he has sold only 1. Whereas he had a markup of $10K
3 months ago, now the cars are advertized at MSRP,
suggesting to me they can be had for less. It sure
seems like sales are settling down, from this limited
perspective.

Pat

burtonbl103

There wont be BIG discounts for a while
But i have heard up to 3k off
i got 2k under msrp !

LS WON

Price went up $265.00

BIG Dave

What was the deal with the GM Card last month? Wasn't there a $1,000 rebate on the C6 when you cash in your earnings?

TRAIL BOSS

You bet