Better earnings among the Big Three U.S. automakers in 2002 have not lifted those companies' stock prices, and one reason is fears about big pension and health-care obligations.
General Motors Corp., Detroit, for example, reported a 2002 profit of $3.9 billion on Jan. 16, up from $2 billion in 2001. That day, the automaker's stock closed at $39.73 per share - $26.05 off its one-year closing high last May. It was trading at $33.06 in midday trading Feb. 14.
Meanwhile, in an earnings conference call, GM officials said they expected pension costs alone to reduce 2003 profits by $1.4 billion, contributing to an overall 28% decline in profits this year. Expected pension contributions for 2003 shaved $2.55 per share off projected earnings for 2003, company officials said, although they still expect to beat Wall Street earnings targets.
On Jan. 10, GM told analysts that its $57.3 billion pension fund was underfunded by $19.3 billion at the end of 2002, despite a $4.8 billion contribution. GM also lowered its expected return to 9% from 10%. Company officials said they expect to contribute another $15.5 billion over the next five years to meet federal funding requirements.
Of course, there are other factors affecting GM's share price, including the future effects of incentives such as zero-percent financing that largely accounted for the company's strong sales last year, and the possible need to pump money into Italian automaker Fiat SpA, in which GM owns a 20% stake.
But pensions are a problem. Ronald A. Tadross, an analyst at Banc of America Securities, New York, who covers the automotive sector, said the costs associated with GM's pension and health-care plans have been factored into the stock price. That's one reason good sales and healthy profits in 2002 have not kick-started the company's share price, he said.
Pension expense "has a direct impact on the stock price, no doubt," Mr. Tadross said. "Investors look at those costs as debt, debt going forward. At GM, the fundamentals are on a downward trajectory, and the liabilities are growing faster than the business."
The story is similar at DaimlerChrysler AG, Stuttgart, Germany. In a preliminary report on Feb. 4, DaimlerChrysler said it would earn a profit of about $1.3 billion. Its U.S.-based Chrysler operation was expected to break even in 2002; it lost close to $2.1 billion in 2001.
On Feb. 14, DaimlerChrysler stock closed at $30.50, well below its high of $50.60 on May 22.
According to Mr. Tadross' calculations, DaimlerChrysler's pension and health-care liabilities shaved $4.20 per share off the company's stock price; pension liabilities account for $3.50 of that hit. And if 2003 ended today, DaimlerChrysler would be looking at another $2 per share hit to its stock price based on pension liabilities alone, Mr. Tadross said.
"Even though operations are not deteriorating massively, your stock is going down because your liabilities are going up," he said.
Dearborn, Mich.-based Ford Motor Co.'s $29 billion U.S. pension fund ended 2002 with $7.3 billion in liabilities. The company contributed $500 million to its plan on Jan. 6, and officials said they would pump in another $500 million later this year as an early contribution for 2004; this follows a whopping $4.6 billion contribution in 2002.
On Jan. 21, Ford announced its net loss in 2002 was $980 million, down sharply from the $5.45 billion it lost in 2001. Since the announcement, the company's stock price has fallen from $9.96 on Jan. 6 to $8.63 as of midday trading Feb. 14. The 52-week closing high was $17.65.
GM, DaimlerChrysler and Ford are far from alone in confronting pension funding issues. Plenty of companies face a massive collective shortfall in corporate pension assets, thanks to a still-struggling stock market and low interest rates that have combined to drive up the present value of future liabilities.
Not yet dumping stocks
Money managers, meanwhile, say they aren't dumping those companies' stocks - yet.
"This is something we routinely think about" in looking at companies, said Donald G.M. Coxe, chairman and chief strategist for Harris Investment Management Inc., Chicago. The firm has $17 billion in assets under management.
Eileen Rominger, chief investment officer of value equity at Goldman Sachs Asset Management, New York, said she thinks much of the market volatility in October and November was due to concerns about pension funding and contributions. She cautioned, however, against assuming that a company has solved its pension problems just because it made a large contribution at the end of 2002.
"It's a multiyear issue," Ms. Rominger said.
"We look at what a company's long-term cash flow generation is going to be, and obviously the pension number is very, very relevant to that."
At UBS Global Asset Management, New York, Thomas Cole, director of research for North American equities, said the pension funding issue is "pervasive" but has already been factored into stock prices of companies in his portfolio.
"We don't own anything at the moment where pension funding is a significant issue," Mr. Cole said, "which is not to say we don't own positions where there aren't pension issues. More than half the companies in the (Standard & Poor's 500 stock index) were using an assumed rate of return of 9% or greater, which we think is a pretty high rate. Those rates have to come down."
Mr. Cole said his team has assumed a more reasonable rate of return would be between 7% and 8%, and he factors that number into evaluations of portfolio companies.
In addition to General Motors, Ford also lowered its return rate assumption, to 8.75% from 9.5%. DaimlerChrysler has not indicated whether it plans a similar move.
Mr. Coxe said the major issue for him is pie-in-the-sky rate of return assumptions. He wonders if companies that are still assuming returns of 9.5% or 10% may be overly optimistic in other areas, too, such as earnings, cash flow or pension fund costs.
"If a guy selling you an SUV with a V-8 engine and all the options tells you it's going to get 14 miles per gallon, you believe him. If he says 43 miles per gallon, you don't believe him," Mr. Coxe said. "A 10% forecast of returns on a pension fund is the equivalent of the 43-mile-per-gallon claim on a great big SUV."