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GM: Money To Burn -- And It's Burning


Finally, some good news for General Motors Corp.'s (GM) tortured shareholders. On May 8, GM revised its first-quarter earnings to report a tidy profit of $445 million. That was a nearly $800 million reversal from the loss the carmaker announced three weeks earlier for the same quarter. From Apr. 20, when GM reported a $323 million loss, to the days following its release on the newfound profit, the stock shot up 25%, to over 26 a share, and is holding firm.

But this is a case where the bottom line isn't the last word. While some analysts suggest buying the stock, credit rating agencies have not budged on giving GM poor marks. Why? GM can't seem to stop chipping away at its $35 billion cash pile. The company went through $6 billion in operating cash last year and a further $1.2 billion in the first quarter. The costs of long-term health-care and restructuring mean the company could keep burning cash for more than two years. "The accounting results don't mean much," says Mark A. Oline, an analyst at Fitch Ratings Ltd., which has put GM on a negative credit watch. "We're focused on the cash."

So is GM's management, and with good reason. Consider this: Last year, GM said it would lay off 30,000 workers and close nine plants by 2008. As GM steadily lays them off, the company must keep paying most of their wages as part of its labor contract. Through next year, GM estimates it could end up paying $1.7 billion to workers who aren't working. That's why it wants them to accept buyout deals this summer. But that, too, eats up cash. "We're still hemorrhaging," says GM Vice-Chairman and Chief Financial Officer Frederick A. "Fritz" Henderson. "Job One for 2006 is to reduce our cash burn."

Then there are health-care costs. Last fall, GM Chairman and Chief Executive G. Richard Wagoner Jr. negotiated a deal with the United Auto Workers that requires GM's 360,000 union retirees to kick in increased sums for health insurance. GM's $5 billion annual outlays for health care will drop by $1 billion a year. But through next year, that savings goes to a UAW health-care fund.

Keep an eye on GM's cash-flow statement, too. In the first quarter the company said its operations generated $800 million in cash. But if it hadn't raised $2 billion from selling most of its stake in Japan's Suzuki Motor Corp. (SZKMF), GM would have blown $1.2 billion in the quarter. The company also tapped $2 billion from a special $15 billion fund earmarked for health-care costs. There's nothing wrong with including the trust in the company's $35 billion war chest. But it can make operating cash flow look better even as the company drains assets. Prudential Securities Inc. (PRU) analyst Michael Bruynesteyn estimates GM will burn $2.8 billion in cash while inking a profit of $240 million this year, and will run through $3.4 billion more cash in 2007 while turning a projected profit of $1.8 billion.

NEW LABOR PACT

That's why talks between GM and the UAW have everyone's attention. Wagoner will probably spend several billion more to help bail out bankrupt parts maker Delphi Corp. (DPHIQ) and avoid a strike that would shut down GM. Next year, it will negotiate a new labor pact with the UAW, asking for deeper concessions on health care and a watering down, if not a nullification, of the UAW's paid layoff benefit. But that, too, is problematic. When Wagoner bargained for a deal on health-care cuts last fall, he agreed not to touch union retiree benefits until 2011. So GM can only ask active workers for more cuts. Says Wagoner: "We aren't done on health care."

With all of the company's cash problems, why would anyone be bullish? Wagoner's restructuring should trim $7 billion in costs and improve cash flow by $4 billion, says KeyBanc Capital Markets (KEY) analyst Brett D. Hoselton. The auto maker also has a wave of new models due this year and next, and it will get $14 billion by the end of 2008 from the sale of half of General Motors Acceptance Corp. (GM). Still, GM's market share continues to fall, and it's not clear that it can sustain reve-nue growth. Wagoner, ever cautious, concedes that "we have a long road ahead."

By David Welch


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