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U.S. Auto Makers’ Profits Will Drop, Analysts Warn

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From Reuters

The hot deals that Detroit is offering car buyers will chill automobile company earnings for the third quarter, industry analysts predict.

The three major U.S. auto makers are expected to report lower earnings for the quarter compared to year-ago figures, as slower production, costly buyer incentive plans and other factors cut profits.

“It’s a tougher environment that exists in the third quarter,” compared to a year ago, said Charles Brady at Oppenheimer & Co. “Competition has increased, raw material costs are up, labor costs are up.”

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Analysts’ estimates of earnings for the U.S. Big Three--General Motors Corp., Ford Motor Co. and Chrysler Corp.--vary, but most are lower compared to last year.

Oppenheimer’s Brady, for example, expects GM to earn 80 to 90 cents a share, Ford $1.25 a share and Chrysler 40 cents a share, excluding a one-time gain from the sale of part of its stake in Mitsubishi Motors Corp.

GM, Ford and Chrysler posted per-share earnings of $1.23, $1.78 and 50 cents, respectively, in the 1988 period.

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The big U.S. auto manufacturers expect to report third-quarter results toward the end of October.

The third quarter is traditionally weak for the auto makers because plant changeovers lower car and truck production, curtailing potential profits.

‘Too Optimistic’

To make matters worse, optimistic forecasts about the size of the U.S auto market earlier this year caused the Big Three to overproduce in the first half. They then installed expensive incentive plans to reduce inventory in the third quarter.

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“First-half production schedules reflected assumptions on the total auto market that proved to be too optimistic,” said Michael Luckey of Luckey Consulting Group.

The heavy use of incentives eroded already-thin profit margins, analysts said. Incentives usually take the form of cash rebates or low-rate financing.

Bear, Stearns & Co. analyst Douglas Laughlin said a third-quarter earnings drop is to be expected, given the higher production in the first half of the year and the drop in the third quarter.

“Earnings are not evenly spread over the quarters” as a result, he said.

Laughlin expects GM to earn 68 cents a share, Ford $1.55 and Chrysler 10 cents in the third quarter. The Chrysler results exclude special items.

Further complicating matters for the auto makers is the increasingly competitive domestic market. By some estimates, there will be more than 350 models of cars and trucks vying for buyers at the beginning of the 1990 model year.

Besides new models, nameplates are proliferating. Toyota and Nissan, for example, are launching new luxury cars this fall.

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Toyota said sales of its new Lexus model were on plan in September, the first month it was available. And Nissan’s Infiniti model, due out next month, is aimed at domestic customers who previously bought European and American cars, Nissan officials say.

To keep from losing more of the market to foreign car makers, the Big Three must maintain sales incentives indefinitely, analysts said.

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