Middle East crisis puts GM’s restructuring to test
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Antony Currie
The Middle East is giving General Motors its first big test since exiting from the junkyard and returning to public markets. As the carmaker’s shares hover at their November public offering price, investors aren’t forgetting what happened when oil prices surged last time around. As crude prices crested over $100 a barrel in 2008 — which they did briefly again earlier this week — GM’s profit center in trucks and SUVs took a big hit.
To be fair, a spike in prices at the pump isn’t likely to send GM back into bankruptcy any time soon. The Detroit behemoth shed more than enough liabilities in its 2009 restructuring to be able to survive. And it cut another $17 billion in debt last year. The question is whether the Motown manufacturer has overhauled its operations radically enough to turn a decent buck manufacturing smaller cars.
Shareholders are clearly anxious. The stock fell by as much as 4 percent after the company announced its fourth-quarter earnings, more than double rival Ford’s dip. That leaves GM shares flitting around the $33 IPO price — having briefly dipped below.
In part the stock’s falling because its $510 million profit wasn’t as good as it looked. GM only beat estimates, and probably only made money, thanks to $800 million of one-off revenue gains, including $200 million each from paying off debt owed to the UAW healthcare trust and from reassessing contingent liabilities on assets owned by the old GM that’s still in bankruptcy. The company also had a $173 million tax benefit.
But GM’s results also exposed how a dip in truck and SUV sales — in the quarter before the turmoil in the Middle East — can still hurt. This reduced North America earnings before interest and taxes by $600 million in the three months to December compared to the third quarter. In addition, GM had to offer more incentives, which sent pricing down by $300 million. Ford weathered these issues more smoothly.
GM has upped its offering of more fuel-efficient vehicles in recent years, including the electric Chevy Volt. For now, though, it looks as if investors are too wary to give the company the benefit of the doubt — and rightly so. GM’s management, led by new Chief Executive Dan Akerson, has yet to show that this time it’s different.