The Wall Street Journal-20080205-GM Is Still Facing Tricky Curves- Incentives on Autos Mar Path to Profit- Doldrums for SUVs

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GM Is Still Facing Tricky Curves; Incentives on Autos Mar Path to Profit; Doldrums for SUVs

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At first glance, General Motors has gotten off to a relatively good start in 2008. While other auto makers' sales slipped in January, GM bucked the trend and posted a gain. Fears have eased about a possible bailout for the mortgage arm of GMAC Financial Services, of which GM still owns 49%.

As a result, GM's stock price had jumped 27% in the past two weeks before declining nearly 5% yesterday.

Rather than hit the accelerator, however, investors would be wise to tap the brakes.

GM still has serious kinks in its core automotive business in North America, and, despite some big cost cuts, it may be challenged to come close to breaking even this year.

The rise in January sales in the U.S. came in part as a result of a surge in rebates and incentives, which erode profit margins. GM may have to keep incentive levels high through the year to lure buyers into showrooms amid the slowing U.S. economy.

Sales of its most-profitable products -- trucks and sport-utility vehicles -- are declining, while sales of cars, which generate less profit, are increasing.

GM has a more attractive lineup of cars, led by the redesigned and heavily promoted Chevrolet Malibu sedan. The improvements that GM has made -- like more-luxurious interiors -- come with a price, and the higher cost of materials on the Malibu and some other redesigned models has offset some of the cost savings the company has achieved.

"To be an attractive stock, they've got to get North America above break-even and in the 2% margin range," said Lehman Brothers Holdings automotive analyst Brian Johnson. He has the equivalent of a "hold" rating on GM stock. Lehman has an investment-banking relationship with the auto maker and holds its shares.

He expects GM to lose $188 million in North America for the fourth quarter, bringing its three-year net loss to at least $46 billion. Minus a litany of charges and one-time items, GM's operating pretax loss in North America since 2005 would be $8.4 billion.

GM hasn't given a forecast of when it will return to profitability, although executives have indicated the Detroit company will be firmly positioned for it by next decade. Mr. Johnson estimates that GM won't hit black ink in North America until 2010, when the company starts realizing the savings from a new health-care trust it is setting up for its unionized workers.

GMAC and its Residential Capital home-mortgage unit, known as ResCap, remain a concern. GMAC reports its fourth-quarter earnings today, and while the numbers are expected to be dismal, there could be light at the end of the tunnel.

At an analyst meeting Jan. 17, GM Chief Executive Rick Wagoner and Chief Financial Officer Fritz Henderson made clear that GMAC will be profitable in 2008 and didn't need a capital infusion from GM and its co-investor, Cerberus Capital Management, in the fourth quarter.

Before that meeting, fears related to GMAC had dragged down GM's stock price. On Jan. 16, it traded at $21.34, a 20-month low and about half of where it was in October. Since the meeting, the stock has shot up. In 4 p.m. composite trading yesterday on the New York Stock Exchange, GM's shares were down $1.41 to $27.57. GM reports its own fourth-quarter results next week. The auto maker, with a market value of about $16 billion, is expected to report a loss for the quarter as well as a huge shortfall for all of 2007, stemming from a $39 billion loss in the third quarter.

In his presentation, Mr. Wagoner said GM, which is sitting on a $30 billion cash pile, expects an additional $5 billion in cost savings during the next three years thanks largely to September's United Auto Workers contract and forecasts for a rebound in U.S. auto sales in 2009.

But U.S. auto sales in 2008 are expected to hit their lowest level in a decade, and to prop up sales GM has been lifting incentives. In January, it spent an average of $2,927 in incentives for each vehicle it sold, according to Autodata Corp. That is 31% more than it spent in January 2007.

GM sells nearly three million vehicles a year through its U.S. dealers, so every $500 of incentives above the industry average represents $1.5 billion in lost pretax profit. In January, GM's incentives were $365 higher per vehicle than the industry average.

GM said the discounts are primarily needed to keep demand rolling on trucks and SUVs. It points to momentum on the "car side of the business," where retail sales jumped 11% thanks in part to the introduction of the new Malibu.

GM sold more than 14,000 Malibus in January, a strong showing but about half the number of Camrys sold by Toyota.

Meanwhile, GM's trucks and SUVs are gasping for breath. GM is in the midst of unleashing four full-size crossover SUVs that are better on fuel economy.