Fear of a warranty war sends GM stock down 6.9%

Analyst downgrades top carmaker's rating

July 11, 2002|By Ted Shelsby | Ted Shelsby,SUN STAFF

Shares of General Motors Corp. went into a slide yesterday after an analyst, expressing concern that the world's largest automaker might be drawn into a costly warranty war, downgraded the company's stock.

Ronald A. Tadross, an analyst with Banc of America Securities, dropped his rating on GM to market performer from buy. The decision was based on his belief that GM will be forced to follow DaimlerChrysler's recently announced 7-year/70,000-mile warranty plan.

G. Richard Wagoner Jr., GM's president and chief executive, said the company will not match DaimlerChrysler's offer.

The warranty "is not something we're thinking about right now," Wagoner said yesterday.

The downgrade took a toll on GM shares, which dropped $3.53, or 6.9 percent, to $47.61 yesterday.

Tadross also downgraded Ford Motor Co., whose stock fell $1.12 to $13.99, a drop of 7.4 percent.

GM is standing by its prediction that it will earn $6 a share this year, said Toni Simonetti, a company spokeswoman. She said the Tadross report was the speculation of one analyst.

Before Wagoner's statement, David Healy, an analyst with Burnham Securities, expressed doubt that GM would follow DaimlerChrysler's lead.

"This is not going to set off a new warranty war in the industry," Healy said. "This was a marketing issue for DaimlerChrysler. Their reputation for quality has suffered recently, and they had to show they were doing something about it."

Healy, who has been more bullish on GM than have many of his colleagues in recent months, lowered his estimate of GM's earnings, but for a different reason. He said he was more concerned about the company's costly incentives aimed at moving cars off the lot. He said GM recently added $350 to its incentive plan, boosting the average cost of a plan to about $2,500 per vehicle.

As a result, he lowered his estimate of GM earnings for the year to $6.65 a share from $7.

DaimlerChrysler began offering the longer warranties last week, as GM reintroduced its zero-interest loans to boost sales. DaimlerChrysler then upped the ante by adding zero-percent financing to its warranty offer.

In downgrading GM, Tadross said the automaker would have to follow DaimlerChrysler's action to protect its share of the U.S. market.

He predicted that DaimlerChrysler's move will start a wave of "infighting amongst the domestics" while they are fiercely protecting their share of the market against foreign automakers.

The report went on to say: "We think GM and Ford will be forced to follow suit because this has helped DaimlerChrysler's [market] share and the DaimlerChrysler strategy is to be the quality leader amongst the domestics. We do not think GM, in particular, will tolerate taking a back seat to DaimlerChrysler on quality."

Bloomberg News contributed to this article.

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