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Is GM's Turnaround Temporary?


Two months ago, Rick Wagoner was in the crosshairs. The chairman and CEO of General Motors (GM) had seen his company's shares stagnate around $20 a share, its major parts supplier was in bankruptcy, billionaire investor Kirk Kerkorian was laying siege, and sales continued to lag. The once-unimaginable thought that General Motors could be facing bankruptcy had Detroit-watchers saying it was only a matter of time before Wagoner was on his way out.

But May has been pretty good for Wagoner so far. After revising its accounting for the first quarter, the $323 million loss it had originally reported swung to a $445 profit. This pushed the stock up about $3 a share, or 13%, just in the past week, and up 32% to about $25 a share since early April.

"IMPORTANT MILESTONE."The question is: Can this momentum last? Are things really getting better for the General -- and Wagoner -- or is this a temporary reversal before things get really bad? Well, here's the good news. The company is making real progress. Its first-quarter profit -- though generated somewhat by accounting work -- is still a legitimate sign that management has stopped the bleeding. What's better is that most of the first-quarter improvement came from better revenue, not just cost-cutting.

Wagoner, in an interview with BusinessWeek, is cautiously optimistic but not yet ready to call it a turnaround. He only reiterates his message that the first quarter is an "important milestone" in fixing the company. "It hasn't been about money as soon as possible," he says. "It's about structuring the company to be robustly profitable going forward."

To Wagoner, that doesn't only mean restructuring. It also involves new cars. He says the Saturn Aura, which has won plaudits for styling, should win over buyers when it comes out later this year. He also points to the sales success of the Buick Lucerne sedan and many of Cadillac's recent offerings. Says Wagoner: "We're gaining share in crossovers faster than anyone."

THE BAD NEWS. In fairness to Wagoner, some of GM's new models are indeed succeeding. "We can build momentum in the market vehicle launch by vehicle launch," he says. But none of its passenger cars nor its minivans and its luxury cars are top-flight, says Eric Noble, president of The CarLab in Santa Ana, Calif. The company is really a segment leader only in large SUVs. Its new pickups coming this fall could easily challenge Ford's F-150 as best-in-class. The Chevy Equinox small SUV is also a top player, Noble says. "GM is still best-in-class only in the segments where it has always been good," he says. "That's not a company that's ready to turn around."

That's because there are still plenty of potholes on the road ahead. Fuel prices are hitting sales of bigger vehicles, and that spells trouble for GM. After the sale of 51% of GMAC is complete, GM will lose half of the finance income that has carried the company. A strike at GM's bankrupt supplier Delphi could yet shut down the company. And analysts say that burning cash is still an issue.

A strike at Delphi would shut GM down in a couple of weeks, Wagoner said. That would be a major cash burn. Even without that, the company has to plow $3 billion into a health-care fund for the union between now and 2011.

Plus, GM's capital expenditures were low in the first quarter. Much more will be spent later in the year. All told, Prudential (PRU) analysts Michael Bruynesteyn says GM will have negative free cash flow of $6.2 billion this year and next. Wagoner says the GMAC sale, which will generate $14 billion, including $10 billion up front, should keep the company flush.

GAS PAINS. As earnings go, gasoline prices are a major issue. Through the start of the year, sales of GM's all-new full-size SUVs were brisk. They added $1 billion in revenue and gave its dealers some much-needed momentum.

Morgan Stanley (MS) analyst Jonathan Steinmetz points out that inventory of the Chevrolet Tahoe (GM's top-selling large SUV) grew to a hefty 115 days' worth of trucks on dealer lots, up from 85 days at the end of March. Auto makers prefer to keep around 75 days' supply.

There's more. At a dinner with analysts this week, GM Vice-Chairman and CFO Frederick "Fritz" Henderson said sustained high gasoline prices present another risk to GM. Its truck owners are more loyal than car owners. So if fuel prices send truck buyers to the passenger car market, GM could lose more of them, Bruynesteyn said in a research note.

GM has for years put its main emphasis on trucks and SUVs. So its car lines have suffered. The company just doesn't have the credibility with cars that it does with truck-based vehicles. "There's no doubt that the strength of our truck brands are stronger than the strength of our car brands," Wagoner concedes. "We need to continue to improve quality and reliability."

CRUNCH TIME. But time is running short. If the GMAC sale closes in the fourth quarter as planned, GM loses half the $2.5 billion or so that the lending unit typically pockets as earnings. If the deal was already done, GM would have made only about $120 million in the quarter. Toyota made that much in about three days in the first quarter. "Losing 51% of GMAC's profits is certainly a hit," Wagoner says. "It does highlight that we need to get the auto business profitable."

There's a good chance that will happen. About $4.5 billion of GM's cost cuts will hit the bottom line later this year. So long as sales don't crater, GM should steadily move along the rough road to sustained profitability.


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