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GM Zooms Past Forecasts

Nat Worden

General Motors (GM Quote) won back fans on Wall Street Tuesday with second-quarter profits that trounced expectations.

Shares of the automaker recently were up 70 cents, or 2.2%, to $33.31, providing a modest lift after the stock was pummeled in last week's market selloff amid credit worries.

The company managed to swing to a profit despite more declines in revenue. While its key North American division recorded more bottom-line losses, the business turned out a surprise profit when one-time charges were excluded.

"This was a very good quarter overall, and it shows that GM continues to make progress in improving itself," says E.K. Riley Investments analyst Robert Toomey, who has long been bullish on GM. "There is some short-term risk in the back half of this year due to high inventory levels. GM is resorting to heavy promotional measures to move products and the competitive landscape in North America remains vicious, but over the long-term, GM is a very attractive turnaround candidate at this point."

GM reported net income for the quarter of $891 million, or $1.56 a share, reversing a year-earlier loss of $3.4 billion, or $5.98 a share.

Excluding charges related to its restructuring, the automaker said it earned $2.48 a share, easily topping Wall Street's target of $1.13 a share, according to Thomson First Call.

GM's revenue declined 13% to $46.8 billion, but it beat expectations as well. Analysts were looking for revenue of $44.4 billion.

Revenue from its automotive operations rose to $45.9 billion for the quarter from last year's $44.8 billion.

"We again saw improved results in sales, income and cash flow this quarter, driven by the continued successful implementation of our business strategies," said GM in a press release.

Last week, GM rival Ford (F Quote) also surprised with much stronger-than-expected second-quarter results. The reports come as GM, Ford and Chrysler prepare for this summer's labor talks, at which they hope to cut their health care bills.

GM's automotive income from continuing operations totaled $764 million on an adjusted basis, compared to an adjusted profit of $367 million a year ago. GM's global sales volume surpassed 2.4 million units in the second quarter, up marginally from the same quarter a year ago.

Global market share was slipped slightly to 13.3% from 13.7% in the year-ago period, driven by a softer U.S. market, a reduction in fleet sales, and fewer incentives. GM market share outside of North America increased to 9.4% in the second quarter 2007, compared with 9.2% in the second quarter of 2006.

GM's North American automotive losses narrowed dramatically to $39 million from last year's $3.95 billion. Excluding certain charges, the business had adjusted income from continuing operations of $78 million, compared to an adjusted loss of $94 million a year earlier.

GM said the North America improvements reflect favorable mix and reduced structural costs. These savings were partially offset by lower volume, favorable policy and warranty adjustments in the prior-year period and unfavorable foreign exchange rates.

"GM is continuing to execute well in terms of cost cuts," says Toomey.

Like Ford, GM also benefited from strong growth overseas, where it derived more than 60% of its sales for the quarter.

On a conference call with analysts, GM CEO Rick Wagoner said he was optimistic about continued growth from emerging markets like China and Russia. He noted that the U.S. economy and auto market "remains challenging."

GMAC Financial Services, in which GM owns a 49% stake, reported net income of $293 million for the second quarter. That was down from $787 million in the second quarter of 2006, which included a one-time gain on the sale of a regional homebuilder of $259 million.

GM recognized $139 million in net income attributable to GMAC.

The financial performance at GMAC represents a $598 million improvement over the first quarter, which was slammed by pressures in the subprime mortgage market.

GMAC's automotive finance, insurance and other operations -- which exclude its home mortgage business -- generated more than twice the net income of these same operations in the year-ago period.

"We're pleased that GMAC returned to profitability in the second quarter, with significantly better results than the first quarter. GMAC's auto financing and insurance businesses continues to post strong results while the company continues to progress in addressing the challenging conditions in the residential mortgage market," GM said.

The automaker also improved its closely watched cash position. It reported $27.2 billion in cash on its balance sheet as of June 30, up from $24.7 billion at the end of the first quarter. Meanwhile, it's expecting $5.6 billion in proceeds from the sale of its Allison Transmission unit -- a deal that has been delayed by financing complications in the debt market.

Toomey says any upside for GM shares in the back half of 2007 will likely come from labor cost reductions that the U.S. auto industry is seeking in its current negotiations with the United Auto Workers union over a new master labor contract.

"I think chances are good that we'll make some progress on that front," says Toomey. "The union understands that these companies need to be viable competitors if the union jobs are going to survive."