General Motors' Wagoner builds 2nd-quarter net, anxiety

July 17, 2002 Alison Fitzgerald writing for Bloomberg News reported that "General Motors Corp. Chief Executive Officer Rick Wagoner has convinced many investors that he knows how to make money making cars. He did it again in the second quarter, generating net income of $2.43 a share.

What has had them worried is whether the largest automaker can support pension and health-care expenses for almost 650,000 workers and retirees, enough to populate Baltimore. General Motors' shares are down 33 percent since May as investors fret about rising costs and the effect of two possible transactions, Fiat Auto SpA and Hughes Electronics Corp., on its balance sheet.

"They're hitting on all cylinders on the car side, but the pension issue is just too big," said Roger Hamilton, vice president at John Hancock Advisers Inc., which owned 102,700 shares as of March and added 27,300 in the first quarter.

Wagoner took steps to ease those concerns in the quarter by contributing $2.2 billion to the pension fund in April and $1 billion to the health-care trust fund in June. He was able to do that, and still add to net cash, because he has built market share on the idea that a bigger company can better handle retiree costs.

General Motors was the only U.S. automaker to gain market share in 2001 and in this year's first half, powered by no-interest loans he introduced after Sept. 11. The 49-year-old CEO, who was paid about $7.5 million last year including stock options, has revived the automaker's truck lineup, cut costs, improved quality scores and hired talent including former Chrysler Corp. Vice Chairman Bob Lutz to fix the car side.

"He's created this atmosphere that things are happening at GM," said Brian Bruce, director of global investments at PanAgora Asset Management, which owned 338,400 General Motors shares as of March and bought 8,000 shares in the first quarter.

2nd-quarter profit

Net income rose to $1.29 billion, or $2.43 a share, from $477 million, or $1.03, the company said in a statement. Revenue rose 4.4 percent to $48.3 billion from $46.2 billion. Profit excluding a $55 million charge for a change in European recycling laws was $2.53 a share, better than the $2.42 average analyst estimate in a Thomson First Call poll.

General Motors shares fell $2.08, or 4.3 percent, to $45.84 as the Dow Jones Industrial Average dropped a seventh straight day.

Wagoner took advantage of General Motors' lower manufacturing costs in North America to push discounts and grab market share from rivals Ford Motor Co. and DaimlerChrysler AG. He offered incentives as high as $3,000 on all of General Motors' main brands in the quarter.

Price pressure

Profit rose even as per-vehicle revenue declined because of a 2 percent drop in vehicle prices. Wagoner this month revived no-interest loans that fueled a car-buying spree late last year, so the price pressure will continue in the third quarter.

"GM has the ammunition to handle the price war ably," said UBS Warburg analyst Saul Rubin, whose company or affiliates have acted as an investment banker and underwritten securities for General Motors in the past year.

Most of General Motors' profit came from North American operations, where it earned $1.25 billion. The finance unit, General Motors Acceptance Corp., earned $431 million and European operations lost $115 million.

Analyst Rubin downgraded the company's shares to "hold" from "buy" last week, citing stock-market losses that some analysts project may leave General Motors' pension fund $20 billion short of what it needs to pay future liabilities, up from about $9 billion now. The $67 billion plan is the largest corporate pension fund in the U.S.

Pension losses

Chief Financial officer John Devine said the pension fund's returns fell 3 percent in the first half and said the fund could end the year underfunded by $12.7 billion.

Wagoner, who declined to be interviewed, told reporters last week that for now he doesn't contemplate changing assumptions that the plan will return an average of 10 percent annually over time.

"The important thing on the pension fund is it's a long-term liability and it's a long-term asset," he said. "As it sits here today we're not contemplating any changes -- but we have to look and get the best experts in and decide if that needs to be reconsidered."

Investors also said they're concerned that Wagoner's alliance strategy -- buying chunks of ailing overseas car companies such as Fiat Auto and Daewoo Motor Corp. -- may backfire, distracting management and costing the company billions of dollars when its liabilities are already worrying investors.

Alliance strategy

General Motors shares have fallen steadily since hitting $68.14 -- the highest price since October 2000 -- on May 14. That's when concern rose that unprofitable partner Fiat SpA might exercise a put option to make General Motors buy the other 80 percent of its Fiat Auto unit starting in 2004.

General Motors said today it will take a charge in the third quarter to write down some of its Fiat investment.

Investors also pushed down shares of General Motors' Hughes tracking stock by 37 percent in the quarter, a sign that they think antitrust issues might thwart the sale of the satellite-television broadcaster to EchoStar Communications Corp. Wagoner is counting on the sale to generate $4.2 billion of cash.

"GM still has quite a ways to go in their earnings and balance sheet," said Chris Wiles, president of Rockhaven Asset Management, which owns General Motors convertible shares. "This is where these guys should be focusing a lot of their time and attention -- really cleaning up the house as much as they can."