June 26 (Bloomberg) -- General Motors Corp., the largest U.S. automaker, fell to the lowest valuation since 1974 after Goldman, Sachs & Co. cut its rating on the shares to ``sell'' because of a worsening sales outlook.

The stock dropped 11 percent, its biggest daily decline in three years. The Goldman revision follows Fitch Ratings' cut yesterday of GM's long-term debt to B-, six steps below investment grade. On June 23, Bank of America told investors that the automaker might need to raise as much as $8 billion.

Gasoline prices that surged 34 percent this year to above $4 a gallon, consumer confidence at a 16-year low and tighter credit conditions have hurt auto-industry profits. GM, which had been rated ``neutral,'' may need to raise money and cut its dividend as its cash flow deteriorates, the Goldman analysts wrote.

``GM's automotive cash flow burn this year and next is likely to lead it to look to raise capital,'' Goldman analyst Patrick Archambault said in the research note. That ``could lead to significant shareholder dilution.''

GM fell $1.38 to $11.43 at 4:15 p.m. in New York Stock Exchange composite trading, the steepest percentage slide since March 16, 2005. The close was the lowest for GM since $11.30 on Dec. 30, 1974, according to Bryan Taylor of Los Angeles-based Global Financial Data, which provides historical share prices.

The automaker's 8.375 percent note due in July 2033 fell 2 cents to 61.5 cents on the dollar, increasing the yield to 13.93 percent, according to Trace, the bond-price reporting service of the Financial Industry Regulatory Authority.

Declining Sales

The automaker's U.S. sales tumbled 16 percent this year through May as consumer preferences shifted to cars and smaller sport-utility vehicles. GM has cut truck production and announced plans to close factories. The automaker hasn't had an annual profit since 2004.

``We've moved quite proactively in adjusting to the fact that consumers are moving out of trucks,'' Chief Executive Officer Rick Wagoner told reporters today in Pittsburgh.

GM is under pressure to raise capital after saying in May that strikes at its largest axle supplier and two of its own plants drained $2.8 billion in this year's first half.

By 2010, GM may go through $18 billion in cash, leaving it with $8.7 billion, the Goldman analysts said. Deutsche Bank analyst Rod Lache has estimated that GM may use up $19 billion.

``We've got a very good, solid funding base,'' Wagoner said today. ``We have a lot of options to fund beyond that,'' he added, without giving specifics.

Cash on Hand

GM had $24 billion in cash and marketable securities and access to about $7 billion in undrawn U.S. loans as of March 31, at least $6 billion more than it initially figured it would need during a U.S. decline, Chief Financial Officer Ray Young said on May 13.

Sales of GM's pickups, SUVs and vans fell 22 percent in this year's first five months, compared with a 16 percent decline for the light trucks industrywide. Large luxury SUVs such as the Cadillac Escalade may generate more than five times the profit of a small car such as the Chevrolet Cobalt, according to Citigroup analyst Itay Michaeli.

GM may report a 25 percent sales decline for June, compared with 17 percent for the industry, Santa Monica, California-based Edmunds.com analyst Chintan Talati said in a note today. Some analysts are forecasting the industry's 2008 annual sales will fall to their lowest in 15 years.

GM shares have lost 84 percent since May 31, 2000, the day before Wagoner became CEO. It's the worst performing stock in the 30-company Dow Jones Industrial Average during the past 12 months, with a 69 percent decline.

The company's shares are rated ``sell'' by three analysts, ``hold'' by seven and ``buy'' by two, according to data compiled by Bloomberg.

More Short Interest

Short-seller James Chanos, president of Kynikos Associates Ltd., said in a Bloomberg Television interview yesterday that GM should consider bankruptcy. He said he is adding to his short position on the automaker.

In a short sale, an investor sells borrowed shares in an attempt to profit by buying them back at a lower price and returning them to the owner.

Short interest in GM more than doubled to 120 million shares as of June 13 from 54 million at the end of 2007, indicating more investors are betting the shares will decline.

Credit-default swaps on GM debt climbed 276 basis points today to 1,889 basis points, according to CMA Datavision in New York. The contracts are designed to protect bondholders against default. A rise in the price indicates a decline in the perception of a company's credit quality.

To contact the reporter on this story: Greg Bensinger in New York at gbensinger1@bloomberg.net

Last Updated: June 26, 2008 17:04 EDT