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Analysts say yes, GM may have profits to report

General Motors Corp. says it will do something next week that’s a rarity these days for U.S.-based automakers: report a profit.
/ Source: The Associated Press

General Motors Corp. says it will do something next week that’s a rarity these days for U.S.-based automakers: report a profit.

GM in January predicted a fourth-quarter net profit when it announced that accounting troubles would delay its quarterly and full-year financial results.

Analysts don’t expect the profit to be huge, but say it’s a sign that GM’s restructuring plan, or at least its massive cost cuts, is beginning to take hold.

The world’s largest automaker, which reported losing $3 billion through the first nine months of last year and $10.6 billion in 2005, says it will report net income for the first quarter in two years when it announces its fourth-quarter and full-year 2006 results sometime next week.

The company won’t predict full-year figures.

A dozen analysts polled by Thomson Financial expect GM to say it earned $1.19-per-share excluding restructuring costs and other special items for the fourth quarter.

For the full year, 10 of the analysts expect earnings of $4.39 per share, again excluding billions of dollars in restructuring costs that will likely leave it with a net loss.

One of the analysts, Kevin Tynan of Argus Research, a New York-based equity research company, said quarterly profits may continue for a while as GM benefits from huge cost cuts made during the past two years, including hourly worker buyouts and health care concessions from the United Auto Workers union.

GM, he said, is entering a period where the cuts have taken hold and have yet to be affected by inflation or anything else that would negate their impact on the bottom line.

“It’s kind of a sweet spot in here where the benefits of the cost cuts outweigh still-rising health care costs, still-softening market share over the longer term,” he said.

At GM’s massive assembly and stamping complex in Lordstown, Ohio, not far from Cleveland, the prospect of a profit and GM’s increased sales figures are not lost on the 3,750 production workers, said local union President Jim Graham.

“There’s confidence by the people and in the products because they know what they’re capable of,” Graham said. “They know we’re going to come out of this thing stronger.”

GM is winding its way through a massive restructuring process that includes more than 34,000 blue-collar workers taking buyouts or early retirement offers. The company said the departures have helped it cut costs by $9 billion on an annual basis, and it is saving money by developing more of its cars globally.

If GM delivers on the quarterly net profit, it would be its first since the fourth quarter of 2004, when it made $630 million.

David Healy, an analyst with Burnham Securities and a GM shareholder, said GM may surpass the analysts’ estimate for the fourth quarter.

But charges relating to the sale of a 51 percent stake in its financial arm, General Motors Acceptance Corp., could have an impact on net earnings, Healy said.

In December, GM announced completion of the GMAC sale to an investment group led by Cerberus Capital Management LP.

He said GM’s February sales, bolstered by a return to a higher percentage of truck sales, are an indication that the company likely will be able to sustain its net income through 2007. GM’s reported a 3.7 percent year-over-year sales increase last month on the strength of its new pickup trucks, while simultaneously reducing its low-profit sales to rental car companies.

“They could very well have snuck back into the black in North America in automotive,” Healy said of GM.

Tynan, though, isn’t so sure GM will be able to keep the profits going beyond 2007 as costs rise to potentially eat into the current savings.

“It’s not over,” he said. “You’re going to have continued escalation in costs as we go 12, 18, 24, 36 months out, and that is really going to be the determining fact if earnings growth is sustainable.”

GM shares lost 7 cents to close at $30.99 Friday on the New York Stock Exchange.