Dear Mr. Berko:

I think I should have an auto stock in my portfolio and have been thinking of owning DaimlerChrysler AG. What do you think of this stock? I know General Motors Corp. and Ford Motor Co. are on their knees but DaimlerChrysler seems to be getting stronger, and its Chrysler cars are selling very well and putting GM and Ford to shame. I don’t think I should own GM or Ford, but if you think it makes good sense at these low prices, I’ll buy 100 shares of each of those companies instead of 100 shares of DaimlerChrysler.

D.P., Moline, Ill.

Dear D.P.:

General Motors and Ford have been crippled by the unions, stinging competition, myriad silly rules and regulations, internal strife and bureaucracies that make Congress look like a grade-school playground. Earnings at GM and Ford are enormously sensitive to the ebb and flow of the world economy and the industry’s volatile dynamics. The future for GM and Ford does not appear sanguine.

DaimlerChrysler’s (DCX-$40.04) earnings, on the other hand, are less spasmodic because of strength in Europe and the company’s enormous product diversity. However, the 1998 merger between Daimler and Chrysler has devastated shareholder value (as I predicted). The integration of the two behemoths was a disastrous cultural clash. Almost every Chrysler senior executive lost his job, a solid business was morphed into an unwieldy leviathan and by 2001 Chrysler’s operating margins crashed from 6.4 percent to a negative 1.5 percent.

However, DCX is much better positioned than GM and Ford. The company has significantly lower pension liabilities and does not have unfunded future health-care costs. DCX’s credit losses (new car loans) are vastly lower than those at GM or Ford. Both Ford and GM generate 100 percent of their operating profits from GMAC and Ford Motor Credit. By comparison, DCX generates 47 percent of its operating profits from its auto credit division. Though DCX’s European business is more stable, it still faces similar challenges plus currency risks to U.S. investors.

Still, I cannot encourage you to own DCX. Chrysler products have finally begun to turn a profit, but when J.D. Power and Associates released its quality survey for 2005 model year vehicles, GM and Toyota dominated the list, and of the 60 vehicles reviewed, just three DCX cars were ranked “runner-up” and not one earned a first place.

DCX has a significant quality problem with its Mercedes-Benz line and this is creating anxious times for the boys in Stuttgart. Today’s Mercedes vehicles are held together with chewing gum, baling wire and glue. That’s one big reason BMW is driving circles around Mercedes in sales. In the past four years, Mercedes cheapened its interiors with plastics that quickly fall from the sideboards, dashboards, seats, headliners and windows. Its carpets wear badly, leather seats crack, window motors stop working, the radio quality is not much better than vacuum tube technology, brakes wear out early with almost predictable regularity while small things in the transmissions and engine often go “bong” and “ding.”

If that weren’t bad enough, it seems that many Mercedes dealers don’t give a flying fig. Heaven help you if something that isn’t under warranty goes wrong. Dealerships charge nearly three times as much as their GM or Ford counterparts for a part and almost twice as much for the labor to install it. My son-in-law, who may be one of the most patient, honest and fair humans I know (he’s a judge), says he will never own another Mercedes.

So no, I wouldn’t buy DCX. This year, DCX expects to post $200 billion in revenues vs. Ford’s $173 billion and GM’s $187 billion and hopes to post $3.05 per share in profits with a $2 dividend. Ford believes it will earn $1 a share and Standard & Poor’s thinks GM will earn a nickel.

If you must own an auto stock, then consider Toyota, Honda or Nissan. Their service is enthusiastic and affordable, their car quality is superb and each gives you a lot more miles for the money.

Both GM and Ford are mired in excess inventory, have serious financial problems, face the likelihood of falling revenues, may reduce or eliminate dividends, must offer huge incentives to encourage sales, and have heavy fixed costs, lots of regulations, strong unions, unpredictable health-care obligations, junk-quality bond ratings and short-term cash problems.

I don’t believe either company is headed for bankruptcy. I believe that GM and Ford will survive and I think it’s a plausible extension of reality to anticipate better things for the Big Two. In that light, both Ford and GM might be excellent speculations for a three- to five-year hold. As we both know, the best time to buy a stock is when there’s blood in the gutters and not a soul will own it.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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