Opel losses hurt GM's U.S. profit, upset investors

DETROIT/FRANKFURT -- General Motors CEO Dan Akerson, having decided to keep the company's Opel unit, will come under greater pressure to cut production and employees in Europe as losses continue to pile up.

GM has been rolling in good news now for more than a year, and that will probably continue with fourth-quarter earnings this week. Through three quarters, GM made more money than in any year since at least 1987, excluding extraordinary gains related to its bankruptcy.

It added market share in the United States, while cutting discounts and took back the title of world's largest automaker from Toyota.

That good news has become more tempered now. The quarterly profit may be GM's lowest since it emerged from bankruptcy in 2009. In its report, GM will reveal the depth of pension shortages and may see continued deterioration in South America, where low-cost imports have put pressure on market leaders.

Dark cloud: Opel

The darkest cloud on GM's horizon is Opel, the biggest contributor to GM's $14.7 billion in European operating losses since 1999.

"What investors are afraid of is that the more Opel is in the news under a negative light, it only makes the restructuring more difficult; it potentially even harms the brand to some extent in terms of market share and sales," said Itay Michaeli, a New York-based analyst at Citigroup Inc., in a telephone interview Feb. 13. "Patience is slowly wearing thin to at least achieve a credible plan to get back to break even."

GM may say this week that profit excluding some items fell to 41 cents a share, the average estimate of 16 analysts surveyed by Bloomberg, from 52 cents a year earlier. While North American operations may have delivered $1.1 billion in earnings before interest and taxes, the average of three analysts' estimates, losses in Europe probably rose from the third quarter to $358 million, undermining the company's progress.

More losses

GM said in November that it couldn't break even in Europe, and Akerson has since dispatched several top lieutenants to Opel, including Vice Chairman Steve Girsky, who took over as chairman of the Ruesselsheim-based unit.

The drama is weighing down GM shares, Michaeli said. GM Europe lost $292 million in the third quarter and $582 million through the first nine months of 2011. In 2010, it lost $568 million in the fourth quarter and $1.76 billion for the year, including restructuring charges.

The analysts' estimates for the final three months last year don't include any one-time items. While GM shares have risen 25 percent so far this year, they remain 24 percent below the $33 level of the automaker's 2010 initial public offering. With a market capitalization of $39.6 billion, GM is trading at 6.24 times earnings, less than half the 14 times earnings that investors pay for the S&P 500 Index.

Depressing stock

"Whenever you have a company that's got a major division losing money without any tangible end in sight to those losses, it does tend to depress the overall multiple," Michaeli said.

GM will give an update to the status of its underfunded pension plans, which were $22.2 billion short at the end of 2010. The U.S. Treasury Department sold 28 percent of GM in the IPO, and it still holds 32 percent of the automaker's shares, acquired as part of the Obama administration's $50 billion bailout.

The United States wants to sell for at least the IPO price, people familiar with the matter have said.

The United States should sell its GM shares now, Republican presidential candidate Mitt Romney said this week in an opinion piece in the Detroit News.

The city would have been better off without the bailout, he said, criticizing the administration's restructuring as "crony capitalism on a grand scale." GM boosted U.S. sales last year by 13 percent while reducing incentive spending per vehicle by 5.1 percent to $3,223, according to researcher Autodata Corp.

U.S. strength

It was an improving U.S. business in 2010 that produced $813 million in earnings before interest and taxes in last year's fourth quarter and propelled GM to a $1.41 billion net income. The full-year profit of $6.17 billion was GM's largest annual income since its predecessor earned $6.7 billion in 1997, excluding profit in 2009 to account for GM's post-bankruptcy recapitalization.

Akerson has been pushing managers to reduce costs to improve GM's EBIT margin, which lags behind that of Ford, Volkswagen and Hyundai.

International operations

GM's international operations, which include China, may have stayed little changed with a $336 million EBIT in the fourth quarter last year, the average estimate of three analysts, compared with $334 million a year earlier.

In South America, GM's operating profit fell to $103 million during the first three quarters of the year from $623 million during the same period in 2010.

Sales globally rose 7.6 percent last year to 9.03 million to overtake Toyota as the world's top-selling automaker. GM had surrendered the global-sales lead in 2008 to Toyota, which then lost production last year after the March tsunami in Japan.

While Opel CEO Karl-Friedrich Stracke has told employees that the automaker hasn't made any decisions on shutting factories, reducing headcount or shifting production, he said "there are issues that need to be addressed."

GM is looking to find greater cost savings between Opel and Chevrolet operations in Europe, Tim Lee, president of GM's international operations, said last month. Lee was appointed to Opel's supervisory board last year. GM may move some work from Korea to Europe to boost revenue and use assets there, three people familiar with the matter have said.

Factories at risk

GM, which has already trimmed its European work force by 5,800, may look to close plants in Ellesmere Port, England, and Bochum, Germany, said Brian Johnson, an industry analyst at Barclays Capital.

GM's plant utilization rate in Europe is 78 percent and is expected to fall to 69 percent this year and more after that, Johnson said. An automaker typically needs at least 80 percent utilization to be profitable.

Over the next 12 to 18 months, Adam Jonas, an analyst at Morgan Stanley, said he expects GM to push cutting 3,000 to 5,000 jobs.

"The conditions are ripe for capacity to exit, not just at GM but also Renault, Peugeot and Nissan," Jonas said in a telephone interview. "We're a bit skeptical. We're not entirely convinced that this will be a smooth process."

Rainer Einenkel, head of the Bochum factory's works council, said he's determined to keep it open. "We have binding contracts with Opel and General Motors, which protect us from plant closures and layoffs," Einenkel said Tuesday in an e-mail, adding that closure had been threatened on numerous occasions in the past. "It's as simple as this: We will not let our factory be shut down."

Jonas, who figures GM stock is should be trading at $45 a share within a year, estimates the value of GM's European operations at a negative $8 billion. The automaker's China business would be worth $10 billion, he said. "The negative value of GM Europe is almost as big as the positive value of GM China," Jonas said.

Source: Bloomberg