At GM, One Tough Year Begets Another - TheStreet

With one tough year behind it,

General Motors

(GM) - Get Report

set goals Wednesday that virtually guarantee another one to come.

The nation's No. 1 automaker earned 60 cents a share in the fourth quarter of 2001, down 58% from a year ago but slightly above analyst forecasts. The profit erosion came despite a slight rise in revenue, reflecting the low-margin sales frenzy that attended the company's 0% finance initiatives this fall. The question analysts have been asking is whether the company and industry doomed itself to a year of anemic sales by stacking the deck in 2001's fourth quarter.

For GM, so far, the answer has been no. Based on a better-than-expected start to January, the company predicted first-quarter earnings that are well ahead of analysts' forecasts. Its goals for the full year, however, will require deep cost reductions.

Solid Start

The company said Wednesday that January sales are running ahead of expectations at about 16 million in annualized terms for the first 10 days of the month. That led it to predict first-quarter earnings of 90 cents a share, well above analyst consensus estimates for 69 cents a share. (Both figures include the company's Hughes operation.)

For GM's stock, which shot up from its lows of Sept. 21 but then hit a ceiling when concerns about 2002 sales prospects surfaced, much will depend on the first several months of this year.

"People are waiting for two things," says Scott Hill, Sanford Bernstein analyst. "One is further evidence of economic recovery, and two is for production to keep improving."

On the

New York Stock Exchange

, investors were apparently unconvinced. GM's shares fell 21 cents, to $49.75.

"There is great concern over the pent-up demand issue. If you start seeing a couple of months where sales don't go into the absolute toilet," it might be evidence that the autumn's soaring sales represented used-car buyers as opposed to new-car buyers who would've otherwise bought cars and trucks this year, he said.

GM is betting demand doesn't evaporate. After cutting production by 10% last year, it will boost it by 7% in the first quarter, well above the industry average of 1.5%. GM is now expecting U.S. sales of between 15 million and 15.5 million units in 2002. If sales continue at an above 15 million-unit pace in the first few months of the quarter, similar increases could be repeated in the second quarter, Hill said.

Deep Cuts

As for 2002, GM predicted earnings of $2.60 a share, above the $2.25 analysts were predicting. That will require superhuman cost-cutting, analysts said. The company has a long-term profit margins goal of 5%, a far cry from the 0.8% net margin it turned in for 2001. Hill said that net margins of between 2.5% and 3% over the current economic cycle, including peaks and valleys, is more likely.

"In our view, to try to achieve 5% margins is probably unrealistic because the secular trends just aren't there unless we get a globally massive restructuring," said Hill.

The company has already announced it won't offer profit-sharing payments to hourly workers in the U.S. or annual incentive awards to GM executives. The company is continuing plans to reduce its salaried workforce by 10% each year -- about 4,700 jobs in 2002 -- through attrition and voluntary buyouts, and a reduction in the number of contract employees. The company will also have to negotiate lower prices from suppliers. GM is trying to bring overall capital spending down to $7.1 billion in 2002 from about $7.8 billion last year.

Good Vibes

GM's primary advantage is in market share, where a newly redesigned truck lineup, particularly its Chevrolet Trailblazer and Chevrolet Suburban, helped it gain from its rivals last year. The company is hoping that more new models will help sustain GM's market share gains, with 40 new products scheduled for release through 2003, even as sales volume is expected to decline by 10% to 15%.

Many of the new vehicles are in key segments where GM doesn't yet have strong market-share momentum, including entry-level luxury vehicles, with the new Cadillac, the youth market (with the Pontiac Vibe) and the small utility segment, which is the fastest-growing sector of the rapidly growing utility-vehicle market, said Scott Hill. By comparison,

Ford

(F) - Get Report

is introducing only half its normal product rollout, and

DaimlerChrysler

(DCX)

isn't planning to launch any new vehicles.