GM's Numbers Signal a Turn

You know things are bad when losing half a billion dollars is a good quarter. But in the case of General Motors (GM), any news that's not so bad is really good. Actually, the $529 million loss -- which is a $323 million loss if you count proceeds from selling its stake in Suzuki Motors -- is a flickering beacon for a company that has been lost at sea for the last few years.

Some of GM's cost cuts appear to be taking hold, but the biggest driver was sales of its large SUVs. Buyers have been snapping them up since they hit showrooms in January, and they are paying as much as $6,000 per vehicle more than they spent on the models that were sold last year.

So, has GM turned the corner? Not yet. But there is progress (see BW Online, 4/13/06, "Lutz Says GM Is Over the Worst"). GM's revenue shot up in the quarter, but sustaining that won't be a slam dunk.


  Whenever an auto company launches a new vehicle, it cranks the plants up to full tilt to get inventory to dealers. The early models are usually loaded, and hence sell at fatter sticker prices.

GM Vice-Chairman and CFO Frederick A. "Fritz" Henderson says the launch of the SUVs accounted for about one-third -- or $1 billion -- of GM's $3 billion revenue gain in North America. Henderson concedes that as GM has launched the vehicles, it has upped production and is selling more top-end trucks. That may trail off as the year goes on, he says.

What's more, gasoline prices are once again jumping up. Right now, people are paying an average of $2.83 a gallon at the pump, according to the Automobile Club of America, almost 60 cents more than a year ago. Analysts say prices could easily hit $3 a gallon this summer.

That can't help SUV sales. Last year, domestic auto makers took a beating as higher gasoline prices slowed SUV sales.


  Of course, expensive gasoline won't kill SUVs. There still are plenty of buyers out there. And GM has the best boulevard boats on the market. GM already has two-thirds of the big SUV market, and its new trucks have made it tougher for Japanese competitors Nissan (NSANY) and Toyota (TM) to get a foothold.

"GM's large SUVs should hold their own," says Jim San Fillippo of Automotive Marketing Consultants. "They are the newest trucks on the market."

There are other problems, too. GM's market share continues to fall, having dropped from 25.2% to 23.7% in the first quarter. Though GM's inventories aren't exactly bloated, if its stake in the U.S. market continues to shrink, the company could have to slow its plants down, says Goldman Sachs analyst Robert Barry. That hits the bottom line.

If GM has to cut production, that puts even more pressure on parts makers. Companies such as interiors maker Lear Corp. (LEA) are struggling, and others, such as Collins & Aikman and Dana Corp., are already in bankruptcy and could see a drop in demand from GM.


  Still, give credit where it's due. GM's losses and its cash born rate are headed in the right direction. Henderson says that GM's previously announced cuts will chop $4.4 billion in costs in the second half.

Plus, in the second half GM will launch its new large pickup trucks. Since many pickup buyers use the vehicles for their livelihood, the market is less affected by high gasoline prices. Like the big SUVs, the new pickups should see gains both in sales volume and pricing.

GM even had some rare good news from Europe, where the struggling auto giant has been bleeding red ink by the billions since 2000: The company actually made $88 million. That's only the second quarterly profit in the Old World since 2000. Even Saab made money. Analysts are cautiously optimistic that GM's European business can be a regular contributor (see BW Online, 3/2/06, "GM-Europe's Saab Story").


  After selling off stakes in Japanese auto makers Fuji Heavy Industries, Suzuki, and Isuzu, GM now has $22 billion in cash. Its massive pension fund is over funded by $7.5 billion. That should keep bankruptcy speculation at bay for a while.

There are other possible problems looming, however. GM still needs to strike a deal with Delphi (


 ) -- the now-bankrupt parts unit it spun out in 1999 -- to deal with the supplier's angry union workers.

If GM, the UAW and Delphi can't get a deal by June, there could be a strike. That would shut GM down in a couple of weeks. Then the losses and cash burn would really accelerate.


  Plus, profits from GM's GMAC finance arm are dropping. They fell $123 million to $605 million for the quarter. If and when GM's sale of 51% of GMAC does through, GM will have to give half of the declining finance earnings to the buyer, an investment group headed by Cerberus Capital Management (see BW, 4/24/06, "Cerberus To KKR: Eat Our Dust").

GM is far from fixed. But there are signs that the company is solving some of its big problems.

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