Even With Big Quarter, GM's Goals Will Be Tough to Reach

The automaker says it'll be halfway there by year-end. Some wonder where the rest will come from.

Author:: Diane Hess
Publish date:: Apr 16, 2002 4:02 PM EDT

General Motors

repeated its forecast for earnings per share of $10 by mid-decade, but even in light of its blowout first quarter, the target still does not seem like an easy one to reach.

In the first quarter, GM earned $791 million, or $1.39 a share, excluding special items and its stake in

GM Hughes

(GMH)

, up from $321 million, or 57 cents a share, a year ago. The automaker attributed its results to strong vehicle sales, an improved product mix, and continued focus on cutting costs.

Looking ahead, GM said 2002 earnings will be about $5 a share, compared with previous estimates of $3.50 a share. The company said it would earn $2 a share in the second quarter.

"If you look at how to get to $10, making $5 this year is a pretty good start," said GM's chief financial officer, John Devine, on a conference call. He added that the $5 was a conservative estimate.

Still, analysts say the chips have to fall GM's way for it to get to $10. "The assumption is doable," said Domenic Martilotti, an analyst at Bear Stearns. "But certain things need to go right for it to happen.

In order for GM to hit that mark, Martilotti said that its European business must turn around. GM had a loss of $125 million in Europe in the first quarter, excluding a $400 million restructuring charge.

Also, Martilotti said, GM has to continue to take market share from domestic competition. While GM's share has been rising in recent quarters, it is still way down from years-ago levels.

Finally, Martilotti said, General Motors must take steps to strengthen its balance sheet. GM said it would earmark $10 billion in 2002 to fund its pension program, putting aside $2.2 billion already.

As of the first quarter, the company had a $10.79 billion pension liability. "The

$10 billion is a near-term target," said Devine, on the call. "We have more to do on a going-forward basis."

In 2002, General Motors expects pension asset returns of 10%, even though returns in 2000 and 2001 were below that level, according to its 10-K filing with the

Securities and Exchange Commission

. "If those returns come in below assumptions," said Martilotti, "things will get more challenging in terms of funding liabilities."

The automaker also had made aggressive assumptions on health care, factoring in a 6% rate of increase in the cost of covered benefits for 2002 and a 7.3% rate of increase for 2003.

"Most of managed health care is assuming a 12% to 14% rise in costs," said Martilotti. "GM is doing some things to limit its exposure to health care inflation, but those efforts will have to be successful."

GM closed up $3.15, or 5.2%, at $64.25; it's up 60% since offering financing incentives in September.