Sunday, July 30, 2006

GM readies key earnings report

Tuesday, July 25, 2006
GM readies key earnings report
Expected May-June profit could offer leverage amid talk of alliance with Nissan and Renault.
Brett Clanton / The Detroit News

In a critical earnings report due out Wednesday, General Motors Corp. is expected to provide the most concrete evidence to date that its turnaround plan is working and, perhaps, that it does not need Japanese and French partners to strengthen its competitive position around the globe.

The world's largest automaker is expected to show a profit in the May-July period despite a multibillion-dollar charge related to its North American restructuring.

Solid profits would be an important milestone for the automaker, which posted a $10.6 billion loss in 2005.

GM Chairman and CEO Rick Wagoner, who has been dogged by questions about his leadership, could cite the improved financial results to make the case that GM doesn't need an alliance with Nissan Motor Co. and Renault SA.

Billionaire investor Kirk Kerkorian has pressured Wagoner to explore the partnership as a way to accelerate change at GM. Wagoner has agreed to study a possible alliance but has indicated he is reluctant to do anything that could distract from the company's turnaround plan.

Analysts polled by Thomson Financial expect GM to earn 52 cents per share on $42.6 billion in revenue in the second quarter. That would make two consecutive profitable quarters after five quarterly losses in a row.

While GM's outlook may be improving slightly, DaimlerChrysler AG's second-quarter earnings, also out this week, could expose some weakness at the Auburn Hills-based Chrysler division.

After a string of hits following its 2001-04 turnaround, Chrysler is expected to see a steep drop in earnings or swing to an operating loss due to weakening sales and higher incentive spending.

The weaker performance should not impede its German parent from achieving profit goals this year, said Citigroup analyst John Lawson in a report. "But shaken confidence in Chrysler has reawakened long-term concerns on the unit."

Last week, it was Ford Motor Co. that surprised Wall Street with a $123 million loss in the second quarter and announced plans to speed up and expand its restructuring. This week, it will be GM and Chrysler in the spotlight.

Despite a slew of new model introductions this year, domestic automakers have continued to struggle in beating back gains by their Japanese rivals and also have been hit hard by a downturn in sales of gas-thirsty SUVs as fuel prices top $3 per gallon.

Through June, U.S. sales by domestic automakers were down 8 percent, and their combined market share had fallen to 54.9 percent, down from 58.3 percent for the same period a year ago, according to Autodata Corp.

Even so, analysts say GM may turn in better-than-expected financials for the second quarter for two main reasons: A 5 percent rise in average vehicle transaction prices due to excitement over new models; and an unexpected rise in factory production during the period. Automakers book a sale once a vehicle leaves the factory, not when a dealer sells the car or truck to a customer.

But Wall Street is also beginning to give GM credit for major cost-cutting actions that will shave $8 billion in annualized costs beginning next year, even if the savings have yet to appear in earnings.

In addition, they see risk of a strike lessening at Delphi Corp., GM's largest parts supplier. And they take a positive view of the federal Pension Benefit Guarantee Corp.'s approval last week of GM's pending deal to sell a majority of its GMAC financing arm. The deal, expected to close by year end, could steer $14 billion in cash to GM and allow the automaker to borrow money more cheaply.

"All considered, we believe the risk/reward continues to improve for GM," said Bear Stearns analyst Peter Nesvold in a Monday report in which he upgraded predictions for GM's second-quarter earnings to $0.56 per share, up from $0.18 per share.

In the second quarter, GM is expected to take a one-time charge of $3.8 billion for a sweeping buyout and early retirement plan that will eliminate more than 35,000 U.S. factory jobs by the end of the year.

But industry Burnham Securities analyst David Healy said not to read too much into the charge.

"Although the charge is a marker for this hugely successful program, it should be noted and forgotten, because it has no relation whatever to operations in the second quarter."

GM shares have risen more than 50 percent this year on optimism that the company's turnaround plan is gaining traction.

On Monday, GM's stock price rose 2.3 percent to $29.67 per share in New York Stock Exchange trading on reports that second-quarter results would be better than expected.

The renewed optimism has helped temporarily ease fears that GM will be forced into bankruptcy in coming years. As of Monday, bond traders effectively rated the chance of a GM bankruptcy at 50 percent within five years, down from a high point of around 62 percent this spring.

GM would not comment on analyst estimates for GM's quarterly earnings.

On Thursday, Chrysler will report quarterly earnings that some analysts predict will not be favorable. Industry watchers have warned of a "sharp deterioration" in results and possibly an operating loss in the quarter due to an over-reliance on profit-eating incentives and production cuts to reduce inventories.

You can reach Brett Clanton at (313) 222-2612 or

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