11 August 2010

GM Sees Biggest Profit in 6 Years

The Wall Street Journal

General Motors Co. is expected to post its largest profit in six years on Thursday, buoyed by stronger sales around the globe and higher prices on cars and trucks sold in the U.S.

People familiar with the matter said the company could earn in excess of $1 billion. GM Chief Executive Edward E. Whitacre Jr. gave an early indication last week that the automaker would report "impressive" results for the second three months of 2010 that will surpass the auto maker's $865 million profit it recorded the first quarter this year.

The company is not expected to surpass Ford Motor Co., which made $2.6 billion in the second quarter on the strength of its U.S. and global automotive operations as well as on profits from its finance arm. Ford, the healthiest of Detroit's auto makers, is helped by its profitable finance arm as well as strength in its global automotive operations.
Turning Point Possible

For GM, a second consecutive quarterly profit by would mark a turning point for GM, which essentially stopped making money from 2005 through 2009 and has been living off a $50 billion U.S. government bailout since last year.

The results are driven by improving sales in every region except Europe and sharply lower expenses as a result of last year's bankruptcy.

Meantime, sales in GM's U.S. market are becoming more valuable on a per vehicle bases. Consumers paid $32,584 on average for a GM car or truck in the second quarter, up 5% from a year ago and a 1.4% increase from the first quarter, according to car shopping site Edmunds.com.

"If you can make products people want to buy and they pay you more than they used to, you are going to make a lot of money," said David Whitson, an auto analyst with Morningstar.

GM's results will be under the microscope on Wall Street as the auto maker prepares a return to public markets targeted for later this year. The move will allow the U.S. government to begin off-loading the majority stake it acquired through last year's rescue of the auto industry.

GM will file registration papers for an initial public offering as soon as next week, in which the company will disclose its business plan, potential risks facing the business and financial state in detail.

Mr. Whitacre has said he is eager to cut ties with the U.S. government as soon as possible, saying the relationship—which led critics to dub GM as "Government Motors"—is a turnoff to potential customers.

The U.S. Treasury would likely start by selling a portion of its shares in GM, leaving the government with a substantial stake in the company after the IPO.

GM's sales in the U.S. are up 14% through July from last years' anemic level. The automaker's U.S. sales are delivering more revenue after the company culled unprofitable brands and models in last year's bankruptcy.

The auto maker's strategy to grow sales in emerging markets is producing results. Thursday's earnings figures will likely show significant revenue gains in Asia, fueled largely by fast growth in China.

GM still has kinks to work out. A major restructuring of GM's European Opel unit is underway, but losses are expected to continue at least through the year.
Seeking Effective Strategy

GM is working to piece together an effective marketing strategy in the U.S., where its advertising has often failed to connect with consumers. Also in the U.S., GM's sales to individual customers declined 3% in July, reflecting in part the company's jettisoning of four brands. GM continues to depend heavily on less-profitable sales to rental and commercial fleets.

The auto maker also outspends the industry on discounts. GM spent $3,691 on incentives per vehicle in the second quarter, down $30 from a year ago, according to Edmunds.

Even so, GM's revenue in North America—which grew nearly 60% to $19.3 billion in the first quarter from a year ago—is on track to grow into the second half of 2010. The auto maker is still ramping up production to meet demand for some popular new vehicles, including a move to cancel the traditional summer shutdown in factories that will mostly be reflected in the company's third-quarter results later this year.

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