Home / World Business
Sat, Jan 15, 2005 - Page 12 News List

GM expects earnings to fall this year

PUSHING HARD Despite struggling with escalating health care costs and flagging profits, GM said it hopes to get back on track by next year, or 2007

NY TIMES NEWS SERVICE , DETROIT

General Motors said on Thursday that its earnings would fall this year because of rising health care costs and slowing profits at its financing division.

"We obviously are pushing hard in '05, but we're not pleased," said John Devine, GM's chief financial officer, at an annual meeting with financial analysts. "We expect to get back on track in '06 and '07," he added.

GM reaffirmed its previous forecast that last year's earnings would be between US$6 and US$6.50 a share when it reports its fourth-quarter results next week. But it predicted that earnings for this year would fall to a range of US$4 to US$5 a share.

Financial analysts had been expecting earnings in that range for this year as health care costs continue to escalate and interest rates rise, making it more expensive for GM to borrow money to pay for zero-percent financing and other low rates to entice car buyers. The General Motors Acceptance Corp, the company's financing division, has been GM's principal profit center for several years.

The company's debt, rated just above junk by Standard & Poor's, is also a concern. A junk bond rating would significantly drive up GM's borrowing costs across the board. To insulate a different part of its operation, GM said Thursday it was considering creating a new holding company for its residential mortgage businesses, which would result in a separate, and ideally, more favorable credit rating.

GM executives also said Thursday that their target of returning to earnings of US$10 a share by mid-decade, first laid out in 2002, would not be met until 2007.

"We think this target is still the right target," Devine said. "We expect earnings to increase and increase substantially from '05 to '06, and we expect them to be up again in '07."

GM is the largest automaker in the world by volume, but its profits are dwarfed by those of competitors like Toyota and Nissan. The company is hampered on numerous fronts, including the obligation to pay health care and pension benefits to about a half million US retirees and their families. Competitors based in nations with socialized medical systems do not have similar retiree health care burdens.

GM's spending on rebates and other incentives is also the highest in the industry. Despite that, the company's share of the US market fell to 27.5 percent last year from 28.3 percent a year earlier, according to the AutoData Corp. In Europe, the company is expecting to report its fifth consecutive annual loss and is working on its latest restructuring effort.

So what could lead to a stronger 2006 and beyond?

The company said future health care costs would moderate. And earnings are likely to be aided by new versions of large pickup trucks and sport utility vehicles for next year and 2007. Those vehicles, like the Chevrolet Silverado pickup and the Chevrolet Suburban sport utility, have been huge profit centers for GM but have not been redesigned in several years and face stiff competition from newer products, like a redesigned F-Series pickup from the Ford Motor Co and Nissan's Titan pickup.

This story has been viewed 2439 times.
TOP top