GM posts strong qtly operating profit; shrs surge
Wed Jul 26, 2006 5:40am ET

By Kevin Krolicki and Jui Chakravorty

DETROIT, July 26 (Reuters) General Motors Corp. (GM.N: Quote, Profile, Research) on Wednesday posted a larger-than-expected operating profit as its restructuring took hold and raised its cost-cutting target by $1 billion, sending its shares to a 10-month high.

GM, the world's No. 1 automaker by sales volume, reported a wider net loss for the second quarter after writing down $4.3 billion in previously announced costs associated with buyouts for almost a third of its factory work force.

But excluding those restructuring charges, GM outperformed the most optimistic Wall Street projections, touching off a rally in its stock and bonds that pulled shares of Ford Motor Co. (F.N: Quote, Profile, Research) higher as well.

Meanwhile, the cost of insuring GM's debt against the risk of default fell sharply on the signs that GM's turnaround effort was producing results.

GM raised its target for cutting recurring costs in North America by $1 billion to $6 billion by the end of 2006.

Chief Executive Rick Wagoner, who has been under pressure to show improvement as GM studies a possible three-way proposal with Nissan Motor Co. Ltd. (7201.T: Quote, Profile, Research) and Renault SA (RENA.PA: Quote, Profile, Research), said the results vindicated the company's strategy.

"Our turnaround has not just gained traction, it's accelerating into high gear," Wagoner said. "While significant work still remains, our ability to identify and initiate $9 billion in cost cuts over the past year is unprecedented in this industry."

Combined with GM's first-quarter net profit, the results show the automaker is on the right track, although sustained gains will hinge on GM's success in moving beyond cost-cutting, Argus Research analyst Kevin Tynan said.

"They have a good opportunity to convince a lot of people that what they are doing is working at least in the near to intermediate term as far as the restructuring actions go," he said.

GM Chief Financial Officer Fritz Henderson said results for the final two quarters of the year would show continued improvement against 2005 results.

But he said GM management would not back away from a commitment to spend three months studying the possible benefits of an alliance with Nissan-Renault, and the chief executive of those companies, turnaround specialist Carlos Ghosn.

"We'll spend 90 days and do a good job assessing (the alliance)," he said. "The second quarter results don't affect that."

AUTO OPERATIONS POST OPERATING PROFIT

GM posted its first operating profit in global auto operations since 2004 after cost reductions in the U.S. market.

The loss in North American operations -- the focus of GM's restructuring -- narrowed to $85 million in the quarter, excluding charges, an improvement of $1.1 billion from the year-earlier period on lower pension and other costs.

The improvement came despite weaker U.S. vehicle sales in the quarter. GM's unit sales were off 17 percent in the quarter, but the automaker steered clear of the big discounts that boosted volume while cutting into margins a year earlier.

GM's introduction of a new line of full-size SUVs such as the GMC Yukon and Cadillac Escalade drove average sale prices per vehicle higher, Henderson said.

High gas prices and rising interest rates have hurt sales of SUVs and pickup trucks, but the new line of GMT-900 SUVs have taken share from rivals in the weaker market.

Total revenue rose to a record $54.4 billion from $48.5 billion. Auto revenue rose 11 percent to $45.2 billion.

On a net basis, GM posted a second-quarter loss of $3.2 billion, or $5.62 per share, compared with a loss of $987 million, or $1.75 per share, for the year-ago quarter.

But excluding charges related to buyouts for over 34,000 of its unionized workers, GM posted a profit of $2.03 per share.

That was more than double the most optimistic analyst forecast tracked by Reuters Estimates for a profit of 80 cents per share. The average forecast had been 51 cents per share.

In recent months, GM has cut factory jobs through buyouts and early retirement offers and clinched an agreement with its major union, the United Auto Workers, that reduces the company's share of health care costs.

Shares of GM were up $1.15, or 3.6 percent at $31.81 in early trade on the New York Stock Exchange, after trading as high as $32.12. The stock has gained 60 percent since the start of the year.

GM's largest individual shareholder, Kirk Kerkorian, has urged consideration of a Nissan-Renault tie-up in a move widely viewed as a means of prodding Wagoner to speed the automaker's turnaround efforts after a $10.6 billion loss in 2005.

Kerkorian's representative on GM's board, Jerry York, had pointed to GM's rate of cash burn at the start of the year as a danger sign for the automaker.

For the second quarter, GM had operating cash flow of $700 million, a more than $2 billion improvement from the year earlier. That included a $1.4 billion dividend from GM's financial arm, GMAC. GM has agreed to sell a controlling stake in GMAC in a deal expected to close in the fourth quarter.