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G.M. Profit Doubles, but Worries on Pensions Hurt Stock
By:
Danny Hakim
DETROIT, July 16 — Profit at General Motors more than doubled in the second quarter, the company said today, but its pension liabilities and its investment in Fiat continued to pull down its stock price. Foremost among Wall Street's concerns is how much money G.M. will have to inject into its huge pension fund to offset the falling value of its stock investments and maintain payments to its more than 400,000 American retirees. G.M. said today that the value of its fund declined 3 percent in the first half of the year. Though that was far better than the 14 percent decrease in the Standard & Poor's 500-stock index in the period, the company had projected a 10 percent gain this year. Such swings can require the injection of billions of dollars to make up the difference. Another worry is the $2.4 billion investment for a 20 percent stake in Fiat, the struggling Italian automaker. John M. Devine, the chief financial officer, said G.M. would take a substantial write-down of the value of that stake in the third quarter. The news overshadowed G.M.'s more positive news. The company earned $1.29 billion, or $2.43 a share, in the quarter, compared with $477 million, or $1.03 a share, a year earlier. Revenue rose to $48.27 billion from $46.22 billion. Excluding losses from its Hughes Electronics division, which it is selling, and nonrecurring charges, the company earned $2.63 a share, beating analysts' expectations of profit of $2.42 a share on that basis, according to Thomson First Call. G.M.'s share of the United States auto market also increased, to 28.1 percent in the quarter from 27.3 percent in the quarter a year earlier. Shares of G.M. fell $2.08, or 4.3 percent, to $45.84. The stock closed as high as $68.02 in May. Despite momentum on sales and earnings, G.M. has not been able to shake concerns about how painful it will be to meet its pension obligations with the stock market sliding. G.M. said today that if its returns were flat for the year, its pension fund would be underfinanced by $12.7 billion, compared with $9.1 billion at the end of last year. But Mr. Devine said the situation was not nearly as dire as some analysts saw. "Our cash requirements are significantly below what a lot of people have been guessing," he said. Last week, Saul Rubin, an analyst at UBS Warburg who had been bullish on G.M., downgraded the stock to a hold from a buy solely because of the pension liability and said if investment returns stagnated the fund could have a $31 billion deficit by 2005 and jeopardize the company's plan to earn $10 a share annually by the middle of the decade. "If one ignores the pension fund, the G.M. story is a good one," Mr. Rubin wrote in a report. He added that it was "unfortunately impossible to ignore the pension issues." There are also concerns from Wall Street that G.M.'s sales are driven by the company's big rebate and interest-free financing offers. Such incentives are good for car buyers but hugely expensive for G.M., as well as Ford and Chrysler, a unit of DaimlerChrysler. Because of quality and reputation issues, the Big Three have to use far more incentives than foreign competitors to sell cars. Big Three incentives were more than $2,500 for each vehicle in June, while the average Asian car sold in the United States had incentives of $857, according to the Autodata Corporation, an industry research firm. Some analysts, though, think that G.M.'s steep stock decline since May makes it an attractive bargain. Scott Hill, an analyst at Sanford C. Bernstein, said if the economy recovered in the second half, as he expects, G.M. would gain twice as much. Not only will its business be strengthened, but a recovering market will change its pension outlook. "The risk to the pension plan hasn't changed in the last two years," he said. "What's changed is that each time the market swoons, it exacerbates the negative issues." Mike Holton, an analyst at the investment firm T. Rowe Price, had a similar view. "If you are worried about the economy and the market, then clearly G.M. has issues," he said. "However, if you think we're heading to a better economy in the second half and gaining traction in 2003, that's clearly positive for G.M. and the automakers. And along with that, you figure the capital markets will act better."FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.
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