White Flight
General Motors Corp. reported Wednesday an 88% drop in first-quarter earnings amid a shrinking U.S. auto market, but still earned 50 cents a share, almost twice Wall Street estimates.
The decline at GM, the world’s No. 1 auto maker and a barometer of the American economy, reflected a 6% contraction in the U.S. vehicle market for the quarter, production cuts in North America and losses in Europe.
GM earned $225 million, down from $1.8 billion, or $2.80 a share, in the first quarter of last year on revenue of $42.6 billion, down from $46.9 billion. The consensus estimate by industry analysts surveyed by First Call/Thomson Financial was 26 cents a share.
“Our first-quarter performance was better than expected, considering significantly reduced production volumes in North America,” GM Chairman Jack Smith said. “While the economic and competitive environment is challenging, we remain focused on our key customer and business priorities.”
Losses in Europe were less than expected, and the GMAC financing arm did better than expected, said John Casesa, senior auto industry analyst at Merrill Lynch in New York. “Nonetheless, we remain wary about the impact of falling consumer confidence and therefore believe that the company’s expectation of $4.25 [for 2001 earnings per share] is optimistic,” Casesa said.
GM benefited from an unexpected source during the quarter: remarkably strong sales from Oldsmobile, the division GM said in December it is eliminating because of losses and sluggish sales.
“Using incentives and an extended warranty program, the company is aggressively selling volume, at retail, as part of the phase-out plan” for the division, Casesa said. “While Olds represented only 6% of North American deliveries, in a tough quarter this has helped fixed-cost absorption.”
The auto maker’s North American income was $120 million in the first quarter, down more than $1.1 billion from the same period last year. GM cut first-quarter production by 20% to reduce bloated inventory at a time when sales are down from last year’s record-setting pace.
In Europe, GM lost $86 million, down from a $221-million profit in last year’s first quarter, because of lower sales, intense price competition and a shift to smaller, lower-margin cars.
“We’ve taken tough actions to restructure our European operations, but the market is proving to be weaker than expected,” Chief Executive Rick Wagoner said. “We are focusing intensely on our new-product introductions to strengthen our brands, and we are pushing even harder to reduce costs to meet the pricing challenges in this demanding market.”
GM also lost $20 million in Asia, due to continued losses at Japanese affiliate Isuzu, in which GM owns a 49% stake. In the Latin America/Africa/Mideast region profitability grew to $6 million, thanks to improved volume.
Wagoner said a battery of new products should help GM’s 2001 earnings. “We have a number of major vehicle introductions this year in key market segments throughout the world as we continue to strengthen our global portfolio,” he said. “The entire GM organization is moving fast to bring new products to market, grow our business and improve our financial performance.”
In the U.S., key new vehicles this year include the Chevrolet Avalanche pickup/sport-utility vehicle; the Chevrolet Trailblazer, GMC Envoy and Oldsmobile Bravada mid-size SUVs, which are having a troubled launch because of a recall involving steering function; the Cadillac Escalade sport-utility and Escalade EXT sport-utility/pickup; the Buick Rendezvous SUV/minivan, and the Saturn VUE sport-utility.
