Updated from 12:03 p.m. EDTInvestors at General Motors ( GM) breathed easier Thursday as the company reported that a smaller amount of red ink flowed from its operations in the first quarter. The world's largest automaker managed to pare its losses and beef up its cash position even while it continued to bleed market share. GM lost $323 million, or 57 cents a share, in the quarter, marking a big improvement from last year's loss of $1.3 billion, or $2.22 a share. This year's results include a charge of $681 million, or $1.20 a share, for a recent health care settlement with its workers, plus other items. Excluding everything but the health care charge, GM lost $529 million, or 94 cents a share, in the latest quarter. That compares with last year's adjusted loss of $988 million, or $1.75 a share. On average, analysts on Wall Street were expecting a loss of 44 cents a share for the quarter, according to the average of estimates compiled by Thomson First Call. That figure comes from a wide spectrum of estimates, with the most optimistic assessment projecting earnings of 6 cents a share, compared with the most pessimistic forecast for a loss of $1.33 a share. The large divergence reflects overlying uncertainties about the auto industry, along with the absence of any earnings guidance coming from Detroit after last year's debacle. GM posted a loss of $10.6 billion for 2005 after its chairman and chief executive, Richard Wagoner, had predicted at the beginning of the year that it would earn $4 to $5 a share. Meanwhile, its debt was downgraded to "junk," its accounting practices came under scrutiny from regulators, and its stock lost almost half its value. Shares of GM recently were trading up $2.07, or 10%, to $22.64, as investors cheered the company's progress. Joseph Amaturo, an analyst with Calyon Securities, said in a research note that GM's results were "meaningfully improved," despite the continued losses. "We believe EPS is rather irrelevant and investors should focus on improved auto results in every region and GM's improving cash balance," wrote Amaturo. "In addition, we expect the company's year-over-year auto improvements to accelerate through 2006 due to ongoing mix improvement and continued cost cutting."
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.
GM's troubles in 2005 led to widespread speculation about the prospect of bankruptcy for the company. Its largest auto parts supplier and former subsidiary, Delphi filed for bankruptcy, and the companies are locked in tough negotiations with the United Auto Workers union, which represents most of their workers. GM has said it will be liable for anywhere from $5.5 billion to $12 billion in costs related to Delphi's bankruptcy. Meanwhile, Delphi recently filed motions in court to void its labor agreements, prompting a showdown with the union that could result in a strike. Not only could a strike decimate GM's cash position, but it also could have major ramifications for the automaker in its own negotiations with the UAW to lower its burgeoning labor costs. GM indicated Thursday that liquidity is "a key focus of the corporation," and its CEO Rick Wagoner told CNBC that talk of bankruptcy for GM is misguided. "The sooner people stop talking about bankruptcy, the better for us," Wagoner said in the interview. In addition to the GMAC sale, GM earlier this year cut its annual dividend payments in half to build up its cash position. It also sold most of its 20% stake in Suzuki during the first quarter, generating about $2 billion in cash. GM also recently announced the sale of its stake in Isuzu, which generated about $300 million in proceeds for the second quarter. GM said it ended the first quarter with $21.6 billion of cash, marketable securities and other short-term assets, up from $20.4 billion at Dec. 31. Last month, GM reached a deal with the UAW to finance early-retirement packages and buyouts offered to as many as 131,000 workers at GM and Delphi. It expects the plan to pave the way for the company to reach its goal of goal of cutting 30,000 hourly jobs by 2008. Last year, it negotiated a deal to cut health care benefits for hourly retirees, and it also has cut benefits for white-collar workers and ended its salaried pension plan. "While we are encouraged by the speed and scale of the changes we're implementing, there is clearly more work to be done," GM said. "Our next key priority is to reach a consensual agreement with Delphi and its unions that makes sense for all of the parties. The agreement we recently reached with the UAW on the attrition program is a significant step in achieving this objective, but there is more important work to do." The No. 2 U.S. automaker, Ford ( F), is set to report earnings before Friday's opening bell. On average, analysts are projecting earnings of 25 cents a share, down from last year's 39 cents a share. Late Wednesday, Ford said it plans to take a $2.4 billion pretax charge this year as part of its restructuring plan. Previously, it said it had expected a charge of $1 billion. "It's possible that as much as GM was surprisingly positive for the first quarter, Ford will be a negative," says Tynan. "They're dependence on SUVs and incentives really sets them up for a disappointing quarter." Ford shares recently were up 31 cents, or 4%, Thursday to $7.91.