GM Fans Breathe Relief

Argus Research analyst Kevin Tynan says he's guardedly optimistic about GM in light of the first quarter's developments.

"There are some things lined up for GM that are positive now," says Tynan. "They're moving right into the heart of the GMT-900 SUV launch and the cost-cutting initiatives will start to take hold through the second half of the year. So, if they can avoid a crisis at [parts supplier] Delphi and a sustained spike in gas prices, they're going to keep growing their earnings. The product side and the cost side are lined up pretty well to make 2006 a pivotal year for GM."

GM's first-quarter revenue rose 14% to $52.25 billion from $45.77 billion. Global automotive sales rose 4.4% to 2.2 million units as strong sales in GM's Asia Pacific and Latin American regions were partially offset by declines in North America. Its global market share was down slightly to 13.2% from 13.3% a year ago.

GM's automotive operations had a $721 million loss on an adjusted basis in the quarter, compared with $1.5 billion a year ago. Its struggling North America division lost $946 million, narrowed from a loss of $1.5 billion a year ago. The company attributed the improvement to "higher production volumes, improved mix and better net pricing." GM Europe reported adjusted earnings of $88 million, compared with a year-earlier loss of $92 million, while earnings from Asian operations increased to $81 million from $70 million.

The company's finance unit, GMAC, earned $605 million in the first quarter, compared with $728 million a year earlier. The performance continues GMAC's long streak of being GM's only profitable business. On a conference call with analysts, GMAC's chief financial officer, Sanjiv Khattri, said higher interest rates squeezed profit margins at the unit's residential mortgage unit, ResCap.

"That's the primary reason why earnings are down year over year," said Khattri.

ResCap earnings fell to $197 million from $351 million last year. Its revenue increased, and mortgage originations rose to $41.6 billion from last year's $36.4 billion. But the company said its "results were negatively affected by lower net margins resulting from both pricing pressures and higher funding costs. In addition, gains on sales of loans were down due to a significant gain in the year-ago quarter from the sale of a portfolio of distressed mortgage loans."

GM recently struck a deal with a private equity-led investor group to sell off a 51% stake in GMAC in return for $14 billion in cash over the next three years, which will help it maintain liquidity.