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GM Rally Sputters Out

Shares drop 4% as investors focus on the automaker's cash burn rather than its profit improvements.

Updated from 10:55 a.m. EDT

General Motors

(GM) - Get General Motors Company Report

posted a strong improvement on its bottom line Wednesday, easily exceeding Wall Street's expectations.

But while the world's largest automaker touted its third-quarter results as evidence that its massive restructuring efforts are paying off, the stock sold off, as investors viewed the company's cash burn and deterioration at its profitable finance business as evidence that more troubles lie ahead.

GM said it lost $115 million, or 20 cents a share, for the quarter. That marks a big improvement from the loss of $1.7 billion, or $2.94 a share, that it logged in the same quarter last year. The results from the latest quarter included special charges totaling $644 million, or $1.13 a share, related to the costly steps GM has taken in the short term to fix itself in the long term.

Excluding the near-term pain, the automaker reported that operating profit was 93 cents a share, well ahead of the 49-cents-a-share profit analysts were expecting, based on the average analyst estimate reported by Thomson First Call.

Revenue rose to $48.8 billion from $47.2 billion a year ago.

"Our third-quarter results again reflect significant progress in our fast-paced initiatives to turn around our business and create a company that is leaner, faster and positioned for long-term sustainable growth," said GM CEO Rick Wagoner.

In its key North America market, GM's automotive operations lost $367 million on an adjusted basis, a $1.3 billion improvement year over year, despite a decrease in production by 96,000 units.

"North America drove the lion's share of the improvement," said GM CFO Fritz Henderson on a conference call with analysts after the earnings release. "That's mainly due to cost reductions."

GM's global auto operations lost $62 million for the quarter, or $116 million on an adjusted basis. That compares with a year-ago auto operations loss of $1.6 billion.

The structural cost reductions, which are on track to total $6 billion in 2006, far offset the impact of the lower production for the quarter.

Still, there was progress on GM's sales side. Its global auto market share was 13.9%, up from 13.7% in the second quarter but still down from 14.4% a year ago. Its U.S. market share was 25.1%, the highest reading this year.

GM also narrowed its estimated range of its financial exposure to its bankrupt supplier and former subsidiary,


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. It now expects the bankruptcy to cost it between $6 billion and $7.5 billion on a pretax basis. The previous estimate was between $5.5 billion and $12 billion.

Despite the operational improvements, shares of GM, which have led the

Dow Jones Industrial Average

this year with an 85% rebound, were recently trading down $1.39, or 3.8%, to $34.78. Argus Research analyst Kevin Tynan says investors were discouraged by the company's cash burn.

GM's cash cushion -- its main bulwark against the threat of bankruptcy in the event of some unexpected catastrophe -- totaled $20.4 billion at the end of the quarter, down from $22.9 billion at the end of the previous quarter.

"I'm not too worried about it, but I think a lot of people view these earnings figures from GM as noisy and confusing, given all the accounting gimmicks that affect the numbers," Tynan says. "You go back to the cash flows as a more concrete indicator of what's going on here, and the decline is obviously not good on an operating basis."

While Wednesday's selloff put a damper on the company's results, the decline in its stock price was roughly equal to its gains this week in the wake of its rival


(F) - Get Ford Motor Company Report

results. Ford, the No. 2 U.S. automaker, reported a loss of $5.8 billion for the quarter on Monday -- it's

largest quarterly loss since 1992.

The disappointment demonstrated GM's head start on its rival in embarking on an audacious turnaround plan, which has included selling off assets like a majority stake in its finance arm, shuttering manufacturing plants and executing a huge employee-buyout plan aimed at paring its bloated cost structure.

The success of the plan and the gains in its stock price provided Wagoner with the ammunition to rebuff pressure from GM's largest shareholder, Kirk Kerkorian's Tracinda Corp., to enter into a global alliance with


. Wagoner ended the talks, prompting Kerkorian's associate, Jerry York, to relinquish the board seat that he won earlier this year.

While his resignation marked a defeat for York in his effort to win favor on the automaker's board, he went down firing with a scathing letter that was quickly made public expressing his doubts about GM's ability to compete in the auto market.

"I have grave reservations concerning the ability of the company's current business model to successfully compete in the marketplace with those of the Asian producers," York said.

His stance gave way to widespread speculation on Wall Street that Tracinda might eventually wage a proxy fight against Wagoner, should his turnaround lose momentum.

"We talk regularly with all our investors, including Mr. Kerkorian," said Henderson on the call. He declined to elaborate on the conversations.

"The continuing cash burn goes to show that GM still has problems it needs to fix," says Morningstar analyst John Novak. "They need to turn that cash flow into a positive soon or there will be trouble again."

Another concern for investors in GM's third-quarter results was the dropoff in earnings at General Motors Acceptance Corp., the company's finance business that has long served as its sole engine of profits. The lending unit reported a loss of $349 million for the quarter due to impairment charges. Adjusted net income fell to $346 million from the $654 million made in the third quarter of 2005.

On the conference call, GMAC's chief financial officer, Sanjiv Khattri, said the unit's profit margins narrowed in the quarter due to weakness in the housing market and increased competition in the mortgage business. He also indicated that there were emerging signs of credit troubles in the company's loan portfolio.

GM agreed to sell 51% of GMAC in April to a consortium of investors for $14 billion, and the deal is expected to close in the fourth quarter. That means that its contributions to GM's cash inflows, which already are in decline, will be cut in half.

"Pretty soon, GM's financial condition will be almost entirely dependent on its automotive business," Tynan says. "I'm not sure the auto business is ready for that yet."