GM Profit Rises; Forecast Below Expectations

DETROIT – General Motors Corp. (GM) on Wednesday posted a 49 percent rise in quarterly earnings, boosted by record results at its credit arm and stronger profits from its automotive business.

The Detroit automaker, however, called its profit from its key North American automotive operations "marginal," but it said July U.S. sales appear strong.

GM, whose shares rose about 1 percent in midday trading, confirmed its earnings projection for 2004, but set a target for the third quarter that was below most analysts' estimates.

GM and cross-town rival Ford Motor Co. (F) suffered double-digit drops in U.S. sales in June, which prompted them to boost their costly incentives to higher levels and raised concerns that they might have to cut production to reduce inventories of unsold vehicles.

"Fundamentally, they've got their work cut out for them in North America," said David Healy, an analyst with Burnham Securities. "The marketing costs, incentives and so forth, hit them harder than they expected."

GM's second-quarter earnings, at the high end of Wall Street forecasts, rose to $1.34 billion, or $2.36 per share, up from $901 million, or $1.58 per share, in the year-earlier quarter. Record results at GM's financing arm propelled profit above expectations and outweighed disappointing results from its North American automotive operations.

GM officials, echoing Tuesday's comments by Federal Reserve Chairman Alan Greenspan (search), said on Wednesday that U.S. sales in July appear to be strengthening.

Sales this month could hit an annual rate in the low 17 million range, but GM will be hard-pressed to match last year's strong July results, Paul Ballew, GM's head of sales analysis, told reporters and analysts on a conference call.

The stronger sales and the traditional summer shutdown of its plants have already helped GM cut inventories, Ballew said.

GM's incentives on its vehicles sold in the United States averaged $4,215 per vehicle in the second quarter, up more than $500 from the second quarter last year, according to Autodata, which tracks industry incentives.

Analysts on average had expected GM to post second-quarter earnings of $2.20 per share, according to Reuters Estimates.

GM said on Wednesday that it expects to earn between 75 cents and $1.00 per share in the third quarter, below most analyst projections, which centered on 98 cents.

GM's sales rose to $49.15 billion in the second quarter from $45.88 billion previously.

General Motors Acceptance Corp., the firm's finance arm, earned a record $860 million in the quarter, up from $834 million previously, despite rising interest rates and a 20 percent drop in earnings from its mortgage operations. GMAC (search) accounted for about 64 percent of GM's total earnings.

GM's global automotive earnings rose to $529 million in the second quarter, up from $140 million in the year-ago quarter, with stronger results in all regions except Europe.

Profit from GM's North American automotive operations rose to $328 million, up from $83 million in the second quarter last year, despite a drop in its U.S. market share.

"I have to say, that's still a very marginal profit," GM Vice Chairman and Chief Financial Officer John Devine said on a conference call.

On Tuesday, Ford said its second-quarter profits more than doubled, but all the gains were driven by stronger earnings from its finance arm, while its core automotive unit posted a net loss.

Shares of GM rose 44 cents to $44.04 on the New York Stock Exchange.

General Motors' bonds performed better relative to Treasuries after the earnings report. Spreads over Treasuries — or the extra yield investors demand for taking a company's credit risk — on General Motors Corp. notes with a 7.125 percent coupon maturing in 2013 fell 0.1 percentage point to 2.12 percentage points, according to MarketAxess.