Plan to rescue GM hits a snag

Adjusted results show profit tops prediction

July 27, 2006|By JIM MATEJA | JIM MATEJA,CHICAGO TRIBUNE

CHICAGO -- Nissan boss Carlos Ghosn might have to unsaddle his steed. Billionaire investor Kirk Kerkorian's proposal for the chief executive of Renault and Nissan to ride to the rescue of financially ailing General Motors Corp. was dealt a setback yesterday.

GM reported a $3.2 billion loss in the second quarter, noting one-time costs associated with its restructuring. But adjusted results gave GM an operating profit of $1.2 billion, or $2.03 a share, far surpassing the 18 cents to $1.17 a share projected by analysts - and leaving them with red faces.

This also might leave Kerkorian, who holds a 9.9 percent stake in the automaker and put the wheels in motion for GM-Nissan-Renault talks, a little red-faced - despite GM's protestations.

"We are going to spend the next 90 days understanding the industrial logic, possible synergies or dislocations, and what might come of this [alliance] and report at the appropriate time," Fritz Henderson, GM vice chairman and chief financial officer, insisted in a telephone news conference.

But analysts disagreed.

"GM insists results have no impact on the talks, but I don't see how they wouldn't because they weaken the idea of an alliance as necessary to save GM when it looks like GM is pretty well saving itself," said Rebecca Lindland, senior analyst with Global Insight.

"Rick Wagoner is the right guy to run GM, and since GM is fixing itself, why bring in another party to serve as a distraction? The last thing GM wants is a rescue ambulance crashing," she said.

Also casting a pall on any alliance is that, on Tuesday, Nissan reported a 25.7 percent drop in operating profit, though that in part was because of a one-time charge, and a 6 percent decline in global vehicle sales, to 826,000.

Kerkorian declined to comment on GM's results, which also included a 12 percent gain in revenue, to $54.4 billion.

"Second-quarter earnings should bury the uninformed notion that existing management is incapable of turning GM around," said Dave Healy, a Burnham Securities analyst.

Chief Executive Officer G. Richard Wagoner Jr., no doubt in response to criticism from Kerkorian that the turnaround isn't going fast enough, issued a strong statement: "I'm particularly pleased with the speed with which we have implemented our turnaround plan. Conventional wisdom is that you can't turn a ship as big as GM around quickly. We aim to prove that ... wrong."

Wagoner pointed out that the company had increased its target for reducing annual costs in North America to $9 billion from $8 billion, which should bolster future financial results.

"Our turnaround hasn't just gained traction, it's accelerating into high gear," he said.

"Each billion it cuts in costs contributes 75 cents a share to earnings," Healy said. "I'm going to have to refigure my GM estimate for the year by several dollars a share, but I don't know by how many yet."

Though the news was better than expected, Peter Morici, professor of the Robert H. Smith School of Business at the University of Maryland, College Park and a longtime GM critic, was not appeased.

"GM sold fewer cars in the first half of 2006 [1.23 million] than in 2005 [1.24 million], and while sales were at better prices closer to those commanded by Toyota, it still faces the task of clearing out inventory and will likely have to cut prices through incentives. Vehicle development costs are spread across too few vehicles."

Henderson said transaction prices in the second quarter rose $500 per vehicle thanks to an increase in full-size sport utility production. Output of those vehicles rose to 151,000 from 110,000 in the first quarter. SUVs bring in an estimated $5,000 to $15,000 per vehicle.

Merrill Lynch analyst John Murphy said full-size SUVs raised GM's revenue per unit for all vehicles to $19,852, up 2.6 percent from the first quarter.

Last year, the automaker posted a $10.6 billion loss and, Lindland said, "The only way for GM to get off track now would be a traumatic global outside event, such as an escalation of the unrest in the Mideast."

GM stock gained $1.34, to $32, on the New York Stock Exchange.

Jim Mateja writes for the Chicago Tribune.

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