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Earnings Will Just Get Worse
-- October 14, 2002

Car manufacturers have increased sales by offering customers zero-percent financing and deferred payment deals. But they have only managed to delay the inevitable: Plunging earnings.

Car manufacturers are in a vicious cycle of price wars. Their incentives programs effectively slash new car prices. Then, new car buyers flood dealerships with their trade-ins, creating a glut of used cars on the market and driving down their prices. That, in turn, means stiff competition from used car sales, which puts pressure on new car dealers to lower their prices or increase incentives yet again. Result: Increased competition and price pressures squeeze profits like a vice.

We warned you last month how Ford and GM, in particular, would face plunging profits as a result of these incentives (See related article: http://www.safemoneyreport.com/home/daily.asp?archive=091102). At the time, this analyst at Merrill Lynch still had a "buy" rating on the companies. But, even with today's downgrade to "neutral," we think the analyst is too positive on the companies. In our opinion, these stocks warrant a "sell" rating.

In fact, our most recent Risk Ratings (as of September 30, 2002) give both Ford and GM a "D" or "risky" rating, which means we believe these stocks are likely to suffer steeper-than-average declines in adverse market conditions and are also vulnerable to declines under stable market conditions.

related article: Merrill Cuts GM, Ford Ratings; Shares Dip