Is GM's Progress Real?

Improved earnings and a possible labor accord may buoy the share price. But the carmaker is still burning too much cash

Finally, some good news for General Motors' (GM) tortured shareholders. On May 8, GM revised its first-quarter earnings to report a tidy profit of $445 million. That was a nearly $800 million reversal from the loss the carmaker announced three weeks earlier for the same quarter. From Apr. 20, when GM reported a $323 million loss, to the days following its release on the newfound profit, the stock shot up 25%, to more than $26 a share. News that GM is well on its way to getting the targeted 30,000 of its 100,000 union workers to accept buyout deals has pushed it just north of $28 a share on Apr. 26.

In fact, a few Wall Street analysts have recommended buying the stock in the past couple of weeks. The latest is Prudential Securities' Michael Bruynesteyn, who sees the accelerated buyout deals and the likelihood that a midsummer accord between the United Auto Workers (UAW) and bankrupt parts maker Delphi will avert a strike and yield savings for GM as signs of hope. Throw in continued solid sales of General Motors' large sport-utility vehicles, and Bruynesteyn thinks GM will earn $470 million in 2006 and as much as $2.2 billion next year.

The latest reports show that GM is making some progress. But this is a case where the bottom line isn't the last word. Even with some analysts now recommending the stock, credit-rating agencies have not budged on giving GM poor marks. Why? GM can't seem to stop chipping away at its $35 billion cash pile.


  The company went through $6 billion in operating cash last year and a further $1.2 billion in the first quarter. The costs of long-term health care and near-term restructuring mean it could keep burning cash for more than two years. "The accounting results don't mean much," says Mark Oline, an analyst at Fitch Ratings, which has put GM on a credit watch. "We're focused on the cash."

So is GM's management, and with good reason. Consider this: Last year, GM said it would lay off 30,000 workers and close nine plants by 2008. As GM steadily lays workers off, it must keep paying their wages as part of its labor contract.

Through next year, GM estimates it could end up paying $1.7 billion for buyouts and furlough money to idled workers. That's why GM is eager to get the buyout deals done. Even though the buyouts will cost it cash, in the end they will take workers off its payroll for good, making that option far more attractive than paid layoffs. "We're still hemorrhaging," says GM Vice-Chairman and Chief Financial Officer Frederick A. "Fritz" Henderson. "Job One for 2006 is to reduce our cash burn."


  Then there are health-care costs. In the fall of 2005, GM Chairman and Chief Executive G. Richard Wagoner Jr. negotiated a deal with the UAW that requires GM's 360,000 union retirees to kick in increased sums for health insurance. GM's $5 billion annual outlays for health care will drop by $1 billion a year. But as part of the deal, Wagoner agreed to put the $1-billion-a-year savings for this year and next into a UAW health-care fund. So GM sees none of the cash savings in 2006. And by 2008, health-care inflation may push GM's cash-burn rate for health care back to today's levels.

Take a close look at GM's cash flow, too. In the first quarter its operations generated $800 million in cash. But if it hadn't raised $2 billion from selling most of its stake in Japan's Suzuki Motor, GM would have blown $1.2 billion in the period. The carmaker also tapped $2 billion from a special $15 billion fund earmarked for health-care costs.

There's nothing wrong with including the trust in the outfit's $35 billion war chest. But it can make operating cash flow look better even as the company drains assets. Prudential's Bruynesteyn estimates GM will burn $2.7 billion in cash while inking a profit of nearly $500 million this year, and will run through $2.5 billion more cash in 2007 while turning a projected profit of $2.4 billion.


  That's why talks between GM and the UAW have everyone's attention. Wagoner will probably spend several billion more to help bail out Delphi and avoid a strike that would shut down GM. Next year it will negotiate a new labor pact with the UAW, asking for deeper concessions on health care and a watering-down, if not a nullification, of the UAW's paid-layoff benefit.

But that, too, is problematic. When Wagoner bargained for a deal on health-care cuts last fall, he agreed not to touch union retiree benefits until 2011. So GM can only ask active workers for more health-care cuts. Says Wagoner: "We aren't done on health care."

With all of the company's cash problems, why would anyone be bullish? Wagoner's restructuring should trim $7 billion in costs and improve cash flow by $4 billion, says KeyBanc Capital Markets analyst Brett D. Hoselton.


  The auto maker also has a wave of new models due this year and next, and it will get $14 billion by the end of 2008 from the sale of half of General Motors Acceptance Corp., its financing unit. Progress is being made.

Still, even bullish analysts note that GM's market share continues to fall, and warn that it's not clear if the auto maker can sustain revenue growth. GM's first round of fix-it moves have stopped the bleeding, but until its performance in the market looks better, it's hard to say that this will be the last round of restructuring. GM will also need to rebuild its balance sheet at some point. Wagoner, being ever cautious, concedes that "we have a long road ahead."

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