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At GM, down looks like up, at least for now

Image: Fritz Henderson
GM CEO Fritz Henderson discussed GM's third-quarter earnings at a Nov. 16 press conference in Detroit.Bill Pugliano / Getty Images
/ Source: contributor

For the many GM watchers who were expecting a quarterly loss north of $2 billion from the automaker, the $1.2 billion loss it actually reported for the third quarter came as a pleasant surprise.

Deutsche Bank auto analyst Rod Lache, who predicted a more than $2.2 billion loss, had anticipated GM would finish the third quarter with far less money in the bank. The automaker wound up with “considerably more cash than was widely expected,” Lache acknowledged.

But the head of the national Republican party, Michael Steele, might have been talking about an entirely different company, to hear his take on the “new” GM’s finances. Steele said the loss was “further proof that President Obama’s economic experiments are wrong for America.”

Steele apparently assumed that the struggling automaker would emerge from Chapter 11 protection a healthy, happy manufacturer posting massive profits and perhaps even single-handedly reversing the job losses the nation, and the auto industry, in particular, has suffered lately.

The federal bankruptcy court GM spent two months in over the summer did approve a massive transformation. The automaker walked away from tens of billions in debt, closed almost 2,000 redundant and poorly performing dealerships, shuttered a score of plants and assembly lines, further trimmed its work force and eliminated half of its North American brands, in the process slashing from 84 to 37 the number of models it offers the public.

But it's absurd to expect GM to jump solidly back into the black in the months after bankruptcy, analysts like Lache warn.

Indeed, GM’s CEO Fritz Henderson cautioned that the third-quarter numbers really can’t even be used as a clear comparison. They cover slightly less than the entire quarter, since the automaker only emerged from court protection on July 10th. And there are plenty of remaining issues to be resolved, meaning the latest financial report did not fully comply with accepted accounting methods.

So, should one dismiss the numbers entirely? Not at all. Despite some uncertainties, the report provides a clear indication that the bailed-out automaker is doing better than even it had hoped for, especially when many potential customers were still steering away from its showrooms because they feared the worst might happen.

The carmaker still wrapped up the quarter with a relatively flat, 19.5 percent market share. Significantly more important, according to new GM sales chief Susan Docherty, is that 95 percent of the vehicles GM is now selling come from the four brands it will keep: Chevrolet, Cadillac, Buick and GMC.

Docherty admits that maintaining market momentum hasn’t been cheap. The automaker is spending as much as $4,700 a vehicle on rebates and other incentives to keep consumers coming to the showroom, though there are signs that GM’s more aggressive ad campaign — directly comparing its products to those of competitors, such as Toyota — may be paying off.

And it helps to be winning some outside kudos. The influential Consumer Reports magazine recently had some generally positive, if mixed, words about GM products. While some older models fell short of the magazine’s expectations, the non-profit group said newer vehicles, such as the Chevrolet Malibu, are definitely showing significant improvements in quality and reliability.

Also, many of those new products are seeing sharp increases in their residuals — think trade-in prices. The new 2010 Cadillac SRX crossover, for example, recently received a 52 percent residual rating from the industry arbiter, Automotive Lease Guide, a 21.5 point increase from the old model. On a vehicle like SRX, with a transaction price that can top $40,000, that translates into an extra $8,000 in value after three years.

There’s no question GM has plenty of problems, cautions Joe Phillippi, an analyst with AutoTrends Consulting. Perhaps the most challenging is to win back more reluctant consumers so that it can stay on track with its post-bankruptcy plans.

In a surprise move, the automaker also announced plans to pay back more than $1 billion of the cash it was loaned by the Treasury Department last year. The goal is to pay down another billion a quarter going forward, meaning the debt would vanish four years ahead of schedule.

“It is my fervent hope,” Henderson said recently, to completely pay back taxpayers for their investment, which now totals more than $50 billion approved by both the Bush and Obama administrations.

The debt being paid down in quarterly installments covers only part of that bailout. The rest has gone in as equity and can only be recovered when GM goes public, late next year, as anticipated. That should be no surprise, observers caution, as it would be wiser to base the timing on an economic recovery, rather than some arbitrary deadline.

Even then, the GAO has warned it will be difficult to unlikely that investors will pay enough for the government’s stake to recover the entire bailout.

Henderson disagrees. He admits the company’s previous stock price peak wouldn’t cover the debt to taxpayers. But back then, the CEO stresses, GM was saddled with a lot of debt that reduced its value. The bankruptcy has largely cleared its balance sheet and that should be rewarded in its IPO price, or so the automaker hopes.

Until that happens, though, GM will need to keep improving its balance sheet each quarter. That will only happen by introducing better products, enhancing quality, and convincing buyers they should once again look to Detroit.