Tough part of GM recovery looms

UPDATED: 10/25/2006 3:50 P.M.

DETROIT -- General Motors today posted operating earnings at the high end of Wall Street expectations, but wary investors sent the stock down more than 4 percent on expectations that the easiest part of the automaker's turnaround was nearing an end.

Improved results had been largely anticipated from GM, which lost $10.6 billion in 2005, and analysts said investor attention was shifting to whether GM would succeed in moving beyond cost-cutting as new products began hitting showrooms.

"It's just not as much of a positive surprise in North America and Europe as we would have hoped for," Morgan Keegan analyst Pete Hastings said of GM's results.

GM, which is slashing more than 34,000 jobs and closing 12 plants, said it was on track to cut $9 billion in operating costs this year.

"They are still in a little bit of a honeymoon as far as cost-cutting goes," Argus Research analyst Kevin Tynan said.

GM posted a narrower net loss of $115 million, or 20 cents per share, compared with a loss of $1.7 billion, or $2.94 per share a year earlier. Revenue rose 3.6 percent to $48.8 billion.

Excluding $644 million in charges for a write-down of the value of its GMAC financial arm, the reorganization of supplier Delphi Corp. and other items, GM posted operating earnings of 93 cents per share.

Analysts, on average, had expected an adjusted profit of 45 cents per share, according to Reuters Estimates.


The results come at a time when GM CEO Rick Wagoner is under pressure to show progress in the company's turnaround. GM's global sales fell 2.5 percent in the first nine months of 2006, as it lost market share to Toyota Motor Corp.

Toyota is expected to overtake GM as the world's largest automaker within a year based on current sales trends.

"The turnaround is obviously a multistage process," Tynan said. "First come the cost cuts; but at some point you have to dig in and put some meat on the bones. Which means they have to look at the top line, look at making better products, look at stabilizing market share."

GM's third-quarter North American market share slipped to 24 percent from 25 percent a year earlier.

GM executives are under pressure as they brace for a possible proxy fight with billionaire investor Kirk Kerkorian, the automaker's largest individual shareholder.

Kerkorian's financial adviser Jerry York -- who quit the automaker's board earlier this month, after GM turned down the possibility of a three-way alliance with Nissan Motor Co. Ltd. and Renault SA -- has flagged GM's negative cash flow as an area of concern.

GM said its automotive cash totaled $20.4 billion at Sept. 30, down from $22.9 billion at June 30. That included the liquid assets of a trust fund for employee health care.

Reversing cash burn is an "important priority" for GM, Henderson said. "We need to get that turned around."


GM narrowed the range of its estimated exposure for benefit guarantees to bankrupt Delphi to between $6 billion and $7.5 billion, from a previous estimate of $5.5 billion to $12 billion -- indicating a deal was drawing closer.

GM, which spun off Delphi in 1999, has been in talks with the parts supplier and its unions over a cost-saving labor deal that would allow Delphi to emerge from bankruptcy.

A deal between the United Auto Workers union, Delphi and GM would avert a strike that could otherwise shut down GM's production and force it to burn through billions of dollars a week.

"We continue to believe Delphi will (reach a deal) without a labor disruption, though we also believe this is the strong consensus view at this point," Bear Stearns analyst Peter Nesvold wrote in a research note.

Nesvold said that a Delphi deal could be a trigger for investors to take profits on GM's rally.

In another closely watched matter, GM said it was on track to close its $14 billion sale of a 51 percent stake in GMAC in the fourth quarter, earlier than some analysts had expected.

GM shares, which reached a 52-week high on Tuesday, fell $1.76, or 4.9 percent, to $34.43 in late afternoon trade.

GM's forward price-to-earnings ratio, based on 2007 estimates, was 7.6 compared with a ratio of about 18 for the Standard & Poor's 500 index. GM typically trades at a discount of up to 50 percent to the broad market because of the cyclical nature of the auto industry.

The stock remains up almost 78 percent since the start of the year.

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