GM profits to hit speed bump

Higher health care costs and interest rates eat at earnings from car and truck loans in '05.

By Ed Garsten / The Detroit News

General Motors Corp. told financial analysts Thursday its earnings will fall sharply this year because of soaring health care costs and higher interest rates that could chill the performance of its red-hot finance arm.

The company expects to earn $2.3 billion to $2.8 billion this year -- between $4 and $5 per share -- down from an estimated $3.4 billion to $3.7 billion in 2004.

"We know we have some tough challenges, and we're going to fix them," GM Chairman Rick Wagoner told analysts meeting in Dearborn on Thursday.

On Wednesday, GM will release final 2004 and fourth-quarter financial results, which will include a $220 million write-off of its remaining stake in Italian automaker Fiat Auto Holdings.

Investors were discouraged by the forecast and helped push GM shares down 2.7 percent, or $1.07, to $37.32 in New York Stock Exchange trading Thursday. The shares have fallen about 30 percent over the last year.

The GM news, along with rising oil prices and corporate layoffs, helped push the Dow Jones industrial average down 111.95 points to finish the day at 10,505.83.

The automaker hopes to achieve earnings of $10 per share as early as 2007 -- about two years later than an original target.

"Those are realistic targets," said David Healy, an analyst with Burnham Securities Inc. "But it's going to be a tough year with a lot of headwinds."

GM's U.S. health care costs will rise $1 billion this year, reducing automotive earnings in North America to $500 million, down from $1.2 billion in 2003 and $3.1 billion in 2002.

"Health care is the biggest issue we have," Wagoner said. "We have a broad-based plan to address it ... and we will address it."

GM's U.S. health care bill is expected to rise from $4.3 billion in 2003 and 2004, to $5.3 billion this year, GM Chief Financial Officer John Devine said. "We have to do something to rein in these very high costs," Devine said.

He blamed the rise in health care spending largely on increased drug prices and called on the federal government to pass legislation that would offer companies some relief, but conceded "we are not optimistic there is a solution in Washington."

GM faces challenges on several fronts this year.

In Europe, it is consolidating plants and cutting up to 12,000 jobs to match car and truck supply with demand. The moves will help reduce its losses in Europe to $500 million this year, GM said.

In North America, GM said 2005 results will be hampered by tight pricing, aggressive competition, and recently introduced products -- such as the Pontiac G6 midsize sedan and Chevrolet Cobalt small car -- that will generate lower profits.

GM's market share in the United States fell to 27.5 percent in 2004 from 28.5 percent on a 1.3 percent drop in sales. While GM lost market share in North America last year, it gained ground in Europe, Asia and Latin America.

Wagoner promised GM will freshen or replace its global car and truck lineup more quickly to boost sales.

Despite improved earnings in Latin America and Asia, GM's worldwide automotive operations remain under severe pressure as rivals add factory capacity and enter car and truck segments GM has long dominated. "We know automotive profitability isn't where it should be," Devine said.

In the U.S. market, GM's biggest source of automotive profits -- full-size pickups and sport utility vehicles -- are still selling fairly well, but rivals have introduced newer products, chipping away at GM's sales. The Chevrolet Silverado, Tahoe, Suburban, GMC Yukon, Cadillac Escalade and other big trucks won't be redesigned until 2006 and 2007.

GMAC, the automaker's finance arm, has propped up the company's bottom line over the past few years as low interest rates for auto and home loans produced record earnings.

But interest rates are expected to continue creeping up in 2005, which will slow GMAC's earnings pace. Still, GM expects GMAC to earn at least $2.5 billion in 2005.

In a related matter, the company said Thursday it is considering a restructuring this year that would split GMAC and a home mortgage business off under a new holding company. GMAC Mortgage Corporation and Residential Funding Corp. would become wholly owned subsidiaries of Residential Capital Corp. The move would shield the units from GM's low corporate credit rating.

Wagoner and Devine assured analysts the 2005 earnings decline will be temporary and will be mitigated by the arrival of higher-priced trucks, moderate increases in health care costs and steady improvements in Europe.

Helped by strong returns on investments, GM's pension fund is fully funded, Devine said.

The company did not contribute to the fund in 2004 and does not plan any contributions this year, Devine said.

"GM problems are well documented," said Steve Girsky, auto analyst with Morgan Stanley in New York. "They seem to facing them head-on. They have been through this before and gotten through. They'll get through it again."