General Motors' ( GM) lending business is the only thing keepingAmerica's largest automaker from falling into the abyss. So it'sunnerving to see this finance arm, called GMAC, report low-quality first-quarter earnings. In the first quarter, GMAC -- short for General Motors Acceptance Corp. -- earned $729 million, while GM's auto business lost $1.83 billion. On a consolidated basis, then, GM lost $1.1 billion, or $1.95 per share. The company had warned investors that the loss was coming, but not until mid-March. Up to that time, it was telling investors to expect earnings of $4-$5 per share in 2005. Now the company says it expects to make just $1-$2 per share. The reduction in earnings guidance, along with fears that rating agencies will downgrade GM's debt to junk and news that GM's unions aren't likely to bow to cost-cutting measures, has crushed GM's stock. It closed down a dime at $26.09 Tuesday. That's nearly 50% below the stock's 52-week high. Detox first
took a bearishstance on GM three years ago, greeting with skepticism thecompany's prediction back then that it would make $10 per share in2005.
GM spokeswoman Toni Simonetti says that GMAC's mortgage earnings were not overly dependent on one-time gains: "GMAC's performance is quite extraordinary, given the more difficult environment in which it operates." There was a big, but expected, drop-off in earnings from GMAC's auto-financing and leasing division. Net income there in the first quarter fell to $248 million from $442 million in the year-earlier period. Despite this drop, GM's auto sales were far more dependent onGMAC financing. In the first quarter, 54% of retail sales were funded by GMAC, compared with 41% in the year-earlier period. That shows that if GM had to cut back on auto financing due to fears over leverage, auto sales would drop off sharply. Also scary was the large jump in the proportion of retail leases. These jumped to 20% of retail sales in the first quarter, compared with 14% in the year-earlier period. That 20% figure is well above 2004 levels and thus suggests that leasing is back as a way to shift units at GM. If so, GMAC may once again become exposed to the risk that the value of leased autos will be lower than predicted when the cars are returned. At $95 million, GMAC's insurance earnings were marginally up from the first-quarter 2004 figure of $91 million.
Khattri also acknowledged that mortgage earnings had benefited from a write-up in the value of so-called mortgage servicing rights, which are balance sheet items that represent the expected earnings from administering payments on mortgages. The MSRs tend to get marked up when interest rates rise. However, no number for GMAC's first-quarter MSR gain was given out. And if there was a big jump in the value of these in the first quarter, it could easily be reversed this quarter, as interest rates have fallen. GMAC's overall earnings took a big dent in the first quarter from a rise in interest costs, which were $3 billion in the first quarter vs. $2.2 billion in the year-earlier period. GM's Simonetti says that GMAC has made great strides in protecting itself against an increase in interest rates and that should protect the unit against any further rises in rates.