GM: Turnaround is working
Earnings fuel debate over alliance
BY MICHAEL ELLIS
FREE PRESS BUSINESS WRITER
July 27, 2006
Opponents and backers of a proposed General Motors Corp. alliance with Renault SA and Nissan Motor Co. could agree on one thing Wednesday: There is evidence to support their case within GM's surprisingly strong operating earnings.
The second-quarter operating profit of $1.15 billion, which was well above Wall Street estimates and fueled a rally in GM's shares, is evidence that GM's turnaround from last year's $10.6 billion in losses is working, GM Chief Executive Rick Wagoner said in a statement.
"Our turnaround has not just gained traction, it's accelerating into high gear," Wagoner said. "Conventional wisdom is that you can't turn a ship as big as GM around quickly. We aim to prove that conventional wisdom wrong."
Without saying it outright, Wagoner's uncharacteristically bold statement implies that GM doesn't need an alliance with the French and Japanese automakers to fix its problems.
As a result of the success of its job-cutting plan, which spurred 34,410 union members -- one-third of GM's U.S. hourly workforce -- to accept early retirement or departure offers, GM raised its cost-cutting rate by $1 billion to $9 billion annually. That's an amount Wagoner said was "unprecedented in this industry."
While GM cheered the results, those who say GM needs an executive like Carlos Ghosn, the CEO of both Renault and Nissan, can point to underlying signs of weakness in GM's North American automotive business.
Higher shipping expenses from increased gas prices and the rising cost of raw materials used in building vehicles offset increased profits from GM's new full-size SUVs, which were launched earlier this year.
Since the excitement over new models may drop off faster than the price of steel or oil, Goldman Sachs analyst Robert Barry warned clients in a note: "This does not bode well for the sustainability of earnings from the new products."
Supporters of an alliance point to long-term benefits, anyway, and won't be swayed by a strong quarter or two.
GM's second-quarter operating profit of $2.03 per share, which excludes several charges, easily beat Wall Street estimates of a 53-cent per-share profit. Total sales hit a record for the second consecutive quarter, rising to $54.4 billion from $48.5 billion in the year-ago period.
The benefits of GM's cost-cutting efforts will accelerate in the second half of the year, GM Chief Financial Officer Fritz Henderson told reporters and analysts.
"The lion's share of our cost reductions in North America we expect to be in the second half of the year. But we did benefit in the second quarter, as well," he said.
GM's stock price, already one of the top performers this year, surged $1.34, or 4.4%, to $32 on the New York Stock Exchange.
Even Jim Cramer, the host of CNBC's "Mad Money" and an influential stock-picker for many Main Street investors, said GM is a screaming buy. "When will people understand that GM is going to 40 bucks? GM is now a very cheap stock," Cramer said on a video on www.thestreet.com.
The stronger second-quarter results could give Wagoner ammunition against the proposal by GM's largest single investor, Kirk Kerkorian, to join the alliance of Japan's Nissan and France's Renault. Some GM supporters see Kerkorian's suggestion as a ploy to put Ghosn, who engineered the successful turnaround of Nissan, at the helm of GM.
David Cole, chairman of the Center for Automotive Research in Ann Arbor and a fan of Wagoner, said the result strengthens Wagoner's position. "Renault-Nissan may need the relationship more than GM," he said.
Including charges totaling $4.3 billion, mostly from job-cutting incentives, GM lost $3.2 billion, or $5.62 per share.
While GM's global automotive business recorded a profit, excluding charges, for the first time since 2004, the North American auto segment lost $85 million.
That's a $1-billion improvement from an operating loss in North America of $1.14 billion in the second quarter last year. But part of those gains resulted from the strengthening Canadian dollar and an accounting change in funds reserved for warranty costs -- items unrelated to how GM's business is really functioning.
In addition, GM's U.S. market share in the second quarter fell to 24.2% from 27.3% in the year-ago period, even as it increased the percentage of sales to fleet customers such as businesses, governments and rental-car agencies, which typically pay lower prices.
Higher gas prices, now averaging more than $3 a gallon across Michigan, could hurt truck sales just as GM launches its new pickups this fall and is counting on improved profits from its new large SUVs.
GM's largest contributor to earnings was an $898-million profit from its GMAC financial services arm. But GM agreed earlier this year to sell a 51% stake in GMAC, which will reduce its share of the profits in the future.
When asked about a partnership, Henderson said the automaker will spend the next 90 days studying the idea. He offered no further details.
A spokeswoman for Kerkorian's investment firm Tracinda Corp. did not return telephone calls seeking comment on Wednesday.
Many on Wall Street are still trying to figure out if an alliance is likely, or necessary.
"It's hard to see really significant benefits" from an alliance, said Joseph Phillippi, president of AutoTrends Consulting Inc. in Short Hills, N.J.
Earnings fuel debate over alliance
BY MICHAEL ELLIS
FREE PRESS BUSINESS WRITER
July 27, 2006
Opponents and backers of a proposed General Motors Corp. alliance with Renault SA and Nissan Motor Co. could agree on one thing Wednesday: There is evidence to support their case within GM's surprisingly strong operating earnings.
The second-quarter operating profit of $1.15 billion, which was well above Wall Street estimates and fueled a rally in GM's shares, is evidence that GM's turnaround from last year's $10.6 billion in losses is working, GM Chief Executive Rick Wagoner said in a statement.
"Our turnaround has not just gained traction, it's accelerating into high gear," Wagoner said. "Conventional wisdom is that you can't turn a ship as big as GM around quickly. We aim to prove that conventional wisdom wrong."
Without saying it outright, Wagoner's uncharacteristically bold statement implies that GM doesn't need an alliance with the French and Japanese automakers to fix its problems.
As a result of the success of its job-cutting plan, which spurred 34,410 union members -- one-third of GM's U.S. hourly workforce -- to accept early retirement or departure offers, GM raised its cost-cutting rate by $1 billion to $9 billion annually. That's an amount Wagoner said was "unprecedented in this industry."
While GM cheered the results, those who say GM needs an executive like Carlos Ghosn, the CEO of both Renault and Nissan, can point to underlying signs of weakness in GM's North American automotive business.
Higher shipping expenses from increased gas prices and the rising cost of raw materials used in building vehicles offset increased profits from GM's new full-size SUVs, which were launched earlier this year.
Since the excitement over new models may drop off faster than the price of steel or oil, Goldman Sachs analyst Robert Barry warned clients in a note: "This does not bode well for the sustainability of earnings from the new products."
Supporters of an alliance point to long-term benefits, anyway, and won't be swayed by a strong quarter or two.
GM's second-quarter operating profit of $2.03 per share, which excludes several charges, easily beat Wall Street estimates of a 53-cent per-share profit. Total sales hit a record for the second consecutive quarter, rising to $54.4 billion from $48.5 billion in the year-ago period.
The benefits of GM's cost-cutting efforts will accelerate in the second half of the year, GM Chief Financial Officer Fritz Henderson told reporters and analysts.
"The lion's share of our cost reductions in North America we expect to be in the second half of the year. But we did benefit in the second quarter, as well," he said.
GM's stock price, already one of the top performers this year, surged $1.34, or 4.4%, to $32 on the New York Stock Exchange.
Even Jim Cramer, the host of CNBC's "Mad Money" and an influential stock-picker for many Main Street investors, said GM is a screaming buy. "When will people understand that GM is going to 40 bucks? GM is now a very cheap stock," Cramer said on a video on www.thestreet.com.
The stronger second-quarter results could give Wagoner ammunition against the proposal by GM's largest single investor, Kirk Kerkorian, to join the alliance of Japan's Nissan and France's Renault. Some GM supporters see Kerkorian's suggestion as a ploy to put Ghosn, who engineered the successful turnaround of Nissan, at the helm of GM.
David Cole, chairman of the Center for Automotive Research in Ann Arbor and a fan of Wagoner, said the result strengthens Wagoner's position. "Renault-Nissan may need the relationship more than GM," he said.
Including charges totaling $4.3 billion, mostly from job-cutting incentives, GM lost $3.2 billion, or $5.62 per share.
While GM's global automotive business recorded a profit, excluding charges, for the first time since 2004, the North American auto segment lost $85 million.
That's a $1-billion improvement from an operating loss in North America of $1.14 billion in the second quarter last year. But part of those gains resulted from the strengthening Canadian dollar and an accounting change in funds reserved for warranty costs -- items unrelated to how GM's business is really functioning.
In addition, GM's U.S. market share in the second quarter fell to 24.2% from 27.3% in the year-ago period, even as it increased the percentage of sales to fleet customers such as businesses, governments and rental-car agencies, which typically pay lower prices.
Higher gas prices, now averaging more than $3 a gallon across Michigan, could hurt truck sales just as GM launches its new pickups this fall and is counting on improved profits from its new large SUVs.
GM's largest contributor to earnings was an $898-million profit from its GMAC financial services arm. But GM agreed earlier this year to sell a 51% stake in GMAC, which will reduce its share of the profits in the future.
When asked about a partnership, Henderson said the automaker will spend the next 90 days studying the idea. He offered no further details.
A spokeswoman for Kerkorian's investment firm Tracinda Corp. did not return telephone calls seeking comment on Wednesday.
Many on Wall Street are still trying to figure out if an alliance is likely, or necessary.
"It's hard to see really significant benefits" from an alliance, said Joseph Phillippi, president of AutoTrends Consulting Inc. in Short Hills, N.J.
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