General Motors Drives Back Into the Black : Automobiles: Analysts say the company’s first quarterly profit since 1990 could indicate a recovery for Detroit.
General Motors Corp. reported its first quarterly profit in 18 months on Tuesday, a development that analysts say may signal the beginning of a long-awaited recovery for the U.S. auto industry.
The slim earnings of $179 million, or 6 cents a share, were a sharp reversal from a string of historic losses. GM said Tuesday that the swing reflected the impact of cost-cutting, higher prices and modest sales gains in its troubled U.S. car and truck business.
The gain comes amid the turmoil of a boardroom coup, plant closings and yet another corporate reorganization during the first quarter. Although the company continues to lose heavily on its domestic vehicles, analysts said its overall results illustrate the benefits of cost-cutting as it intersects with expected growth in the economy and higher car sales.
“These results evidence the beginning of a domestic turnaround that could be very big,” said Douglas Laughlin, who follows the auto industry for Bear, Stearns & Co. in New York.
Separately, GM Chairman Robert Stempel said that the company will accelerate its plan to close 21 plants and eliminate 74,000 jobs.
“We cannot wait for the economy to improve. We need to be profitable, whatever the industry volume,” Stempel told a group of business news editors and writers meeting in Chicago.
However, Stempel would not give a new target date for completion of the North American streamlining effort, now scheduled to end by 1995.
In his first appearance since the boardroom coup, which included his removal as head of the Executive Committee, Stempel said he remains in charge of the world’s biggest auto maker. The clear message sent by the board was that it did not want to wait for an upturn in the economy for management to improve GM’s fortunes, he said.
Ford Motor Co. is expected today to report first-quarter earnings of up to $115 million. On Thursday, Chrysler Corp. is expected to report a first-quarter loss of $50 million to $130 million. The expected loss is because of heavy start-up costs for Chrysler’s new Jeep Grand Cherokee; the company is thought to be well positioned as the year unfolds.
Any true recovery for auto firms would require a much bigger increase in vehicle sales than has been posted so far. Although GM boasted of a 14% rise in U.S. vehicle sales in the first quarter, those are sales to dealers--who themselves only managed a 2% year-over-year increase to consumers.
Although Americans aren’t buying many more cars, they are paying more because of price increases imposed over the past few months by the Japanese. U.S. firms haven’t posted price increases, but the Japanese actions have enabled them and their dealers to reduce the big discounts they had been offering and thus realize more money per sale.
One analyst estimated that GM’s sales incentives were lowered from an average of $1,100 to $900 per vehicle. That is an effective $200 price increase, which would have added nearly $200 million to the bottom line in the first quarter alone.
The U.S. firms have also begun to wean themselves from a lopsided reliance on their barely profitable sales to rental-car companies. All report a recent healthier proportion of traditional retail sales, which bring more money.
Both factors were cited Tuesday by GM, whose results were better than expected by Wall Street analysts. Most expected the firm to lose $100 million to $200 million, while optimists saw a break-even performance for the quarter.
Analyst Laughlin said the higher prices and other outside factors were bolstered by internal actions taken by GM management over the past year--dividend and capital spending cuts, a hiring freeze, restructurings and other steps--whose effects have been building.
“We’re starting to see the effects of actions begun a year ago, and this doesn’t even reflect the latest restructurings,” said Laughlin, referring to a reorganization and plant closings announced in February but still being implemented. “The benefits from that are still to come. It creates substantial reason for optimism.”
GM’s first-quarter results, on sales of $32 billion, contrasted with a year-earlier loss of $144 million on sales of $29 billion. However, GM put its year-ago operating loss at $1.1 billion, and said that this quarter’s big swing in earnings was “due principally to improvements in our North American automotive operations.”
The company has not turned a profit since the second quarter of 1990. Soon after, Iraq invaded Kuwait, unleashing economic forces that mauled the U.S. auto industry and ended up hitting GM the hardest.
GM piled up $8.1 billion in losses over the next six quarters, including a 1991 net loss of $4.5 billion, the worst in U.S. corporate history. Profits outside its U.S. vehicle business masked an estimated $7-billion loss at home.
Tuesday’s results may have offered some satisfaction to Stempel, and his recently ousted president, Lloyd Reuss, whose failure to turn around the North American vehicle business led to his replacement by John F. Smith Jr. earlier this month.
But without saying how much, GM acknowledged that its domestic operations remain deeply in the red.
A New York-based analyst, who asked for anonymity because his brokerage is among the many underwriting GM’s enormous common-stock offering of up to $2.4 billion, estimated that the company’s North American operations lost $850 million in the first quarter--a huge figure but less than half of the $2.1-billion loss estimated for the year-earlier quarter.
The North American losses were more than offset by what GM described as continued “strong profits” overseas and healthy earnings in its aerospace, computer and finance subsidiaries.
Stempel conceded: “While we have made significant progress in improving the financial performance of the North American automotive operations, there is a considerable way to go before we will be fully satisfied with our financial results.”
