Earnings Suggest GM Recovery Is on Course

By Martin Zimmerman

July 27, 2006 12 AM PT

Times Staff Writer

General Motors Corp. posted surprisingly strong secondquarter results Wednesday as cost savings from a massive restructuring plan began to kick in and its struggling U.S. auto operations showed signs of life.

It was GM’s first earnings report since investor Kirk Kerkorian began pressuring the world’s largest car company to explore an alliance with rivals Renault and Nissan Motor Co. The upbeat results were seen by some analysts as bolstering Chairman and Chief Executive Rick Wagoner’s bid to turn GM around without the help of partners.

The second quarter “indicates that Wagoner is doing a darn good job,” said John Wolkonowicz, an automotive analyst with Global Insight Inc. “The Kerkorian proposal looms more silly as each day passes.”

As in previous quarters, much of the improvement came in GM’s overseas and auto financing divisions, and the lion’s share of gains in North America came from cost cutting rather than higher vehicle sales.

Detroit-based GM reported a net loss of $3.2 billion, or $5.62 a share, for the three months ended June 30. Revenue increased 12% to $54.4 billion.

Excluding $4.3 billion in costs mainly associated with shedding 34,400 factory workers through buyouts and early retirements, the company earned $1.2 billion, or $2.03 a share.

That easily topped the consensus Wall Street forecast of operating profit of 55 cents a share and sparked a rally in GM shares. The automaker’s stock rose as high as $33.06 before closing up $1.34, or 4.4%, at $32 -- its highest close since September.

“Our turnaround has not just gained traction; it’s accelerating into high gear,” Wagoner said, although he noted that “significant work still remains” before GM is on solid footing.

Some analysts questioned whether the company could maintain its momentum if the U.S. economy slowed markedly.

“The question now is, ‘How sustainable is this?’ ” Morningstar analyst John Novak said. “They’re facing head winds: higher interest rates, higher gas prices, slower home sales.”

Novak also noted that GM, like other manufacturers, had been hit with higher raw material and freight costs.

Those concerns were echoed by credit-rating firm Standard & Poor’s Corp., which said Wednesday that it might cut GM’s debt rating despite the improved earnings. The automaker’s debt is already rated B, five notches below investment grade.

GM said Wednesday that it expected its restructuring to yield $6 billion in savings this year and $9 billion annually after that. Those estimates are $1 billion higher than previous forecasts.

The turnaround plan was launched this year. GM has been losing U.S. market share and billions of dollars as it struggles with aggressive competition and heavy pension and healthcare costs. In addition to reducing payrolls, the plan calls for closing 12 North American facilities by 2008 and trimming annual production by 1 million vehicles.

Of the workers who accepted buyouts or took early retirement, 10,000 have already left the company; most of the others will depart by the end of the year.

Savings already achieved by reducing pension and healthcare costs, as well as lower warranty expenses and other cost cuts, helped the North American division reduce its second-quarter loss to $85 million, excluding special charges, from $1.1 billion a year earlier.

GM is pinning its hopes in North America on a lineup of fresh designs, including large crossover models that combine elements of traditional sport utility vehicles with the generally better gas mileage and smoother handling of passenger cars.

Wolkonowicz of Global Insight said notable new models, including the 2007 GMC Acadia, Buick Enclave and Saturn Outlook, should be popular with drivers who are reluctant to give up their SUVs but are spooked by $3-a-gallon gasoline. The three crossovers, he said, could help GM replace profit lost through falling sales of Silverado pickups and Suburban SUVs.

During a conference call, GM executives had little to say about the prospects of an alliance with Renault and Nissan. The companies entered talks almost two weeks ago at the urging of Kerkorian, GM’s biggest shareholder, with the goal of reporting back in 90 days on whether to proceed.

Kerkorian has suggested that the foreign auto companies take an equity stake in GM, but GM Chief Financial Officer Frederick Henderson said, “Right now, that is not on the radar screen.”

A spokeswoman for Tracinda Corp., Kerkorian’s Beverly Hills-based investment firm, declined to comment.

Part of the attraction of hooking up with Renault and Nissan would be the opportunity for GM to tap the expertise of Carlos Ghosn, CEO of the French-Japanese partnership. However, analysts noted that Nissan reported a slump in worldwide sales Tuesday when it released its fiscal first-quarter results, although it reiterated its full-year profit forecast.

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Revving up

Profit by segment*

Asia Pacific

QII’05 (In millions): $183

QII’06 (In millions): $167

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Latin America, Africa, Middle East

QII’05 (In millions): $25

QII’06 (In millions): $156

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Europe