Automobile industry analysts with Morgan Stanley put forth a bearish outlook for the auto sector on a conference call held last week, forecasting weak cash flows for the first quarter and sluggish global demand.

"It's a challenging time right now, that's very clear," said equity auto analyst Steve Girsky. Girsky added that he expects weak cashflows for the first quarter on the low dealer sales volumes experienced, and as volume declines, a significant amount of cash is used as working capital. "Keep your crash helmet on, folks," Girsky quipped. "Cashflow could look pretty rough in the first quarter." Girsky indicated that this effect could get worse as companies try to raise prices amid flagging sales. The automobile consumer price index has risen steadily over the past four months but purchases have not kept pace.

"Consumers are buying less expensive cars or not buying them at all," he said, adding that the overall outlook for demand is not good. "There is nothing economically out there telling me car sales are going to rocket into orbit." Interest rates, gas prices and higher prices for the automobiles themselves are all conspiring against the industry to keep sales low right now.

Girsky noted that demand has been weak not just in the U.S., but on a global scale, and the big negative surprise has been Europe. European automobile analyst Adam Jonas, noted that Western Europe is off to a difficult start, weighed down by weak sales in Germany, where unemployment is at "post-war" levels of 12%. Sales declined in the first two months of the year, but picked up slightly in March, added Jonas. Still, European sales would have to grow by 1% for the rest of the year just to stay flat in terms of year-over-year performance, and that seems unlikely. Jonas said Latin America is the only region where companies will likely grow profit in 2005.

Turning to individual auto manufacturers, Girsky said the recent earnings estimate cut by General Motors Corp. could be viewed as a "catharsis" if the company can rise from the ashes with a new plan for increasing profitability. So far, Girsky said he has seen no such plans from GM or any other of the major auto manufacturers. "We're waiting for the action," said Girsky, noting that Ford Motor Co. also lowered its earnings guidance recently, though not by as much as GM. Ford also has the advantage of having a stronger vehicle mix than GM and a lighter legacy burden associated with paying benefits to retired employees.

Girsky said the picture looks dull for DaimlerChrysler as well, saying it will be a surprise if the company does not issue its own profit warning for 2005. He said profits are already expected to be 10% lower, year-over-year, for the first quarter.

In Europe, Jonas said the Korean car manufacturers have had the market-share edge so far this year, with BMW AG and GM also performing well. Fiat, DaimlerChrysler and Ford also saw reduced market share in Europe. European manufactured cars, as a share of U.S. purchases, have declined for the fourth month in a row and are at their lowest levels since October 2001, said Jonas. He said those manufacturers have no incentive to push volume in the U.S. because the U.S. dollar is bouncing off all-time lows against the euro.

Copyright 2005 Thomson Media Inc. All Rights Reserved.

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