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It’s too early for GM to party

May 18, 2010

It’s too early for GM to party

$865M 1st-quarter profit is first since ’07


It’s way too soon to break out the champagne, but the new General Motors Co. is showing the beginnings of something that bedeviled its predecessor for way too long — generating cash and booking profits in North America.

In a widely anticipated announcement Monday, the Detroit automaker said it earned $1.2 billion pre-tax in its home market during the first three months of this year and produced $1 billion in free cash flow, a crucial marker of any sustainable business.

The performance won’t quiet legions of critics opposed to government bailouts, Washington’s meddling in the auto industry or the resuscitation of an Old Economy relic and its principal union. But GM’s $865 million in net income, the company’s first quarterly profit in three years, should stand as evidence that another Detroit icon can profitably build the cars and trucks that Americans want to buy — because it is.

There are all sorts of reasons to doubt whether GM’s traction is for real, mostly because its government-mandated bankruptcy was so surreal. In less than two months last year, shareholders were wiped out; bondholders got hammered at the behest of the Obama White House; more than $50 billion in taxpayer money was pumped into the automaker in the form of direct loans and a 61 percent equity stake.

All true, and all fodder to second-guess the legitimacy of GM’s impressive turnaround. Except that who owns the majority of the company’s equity cannot account for rising transaction prices on the sale of new cars and trucks. Nor can it explain how average incentive spending has dropped to roughly $3,000 per vehicle sold from $5,000 per vehicle a year earlier.

A sharp slide in inventories — to a 66-day supply of cars and trucks at dealers from a 152-day surplus a year ago — testifies to normalizing conditions for GM, as do its plans to bump production. Dealers report shortages of hot, well-equipped models like the Chevy Equinox crossover, which is generally a good problem to have.

Those metrics, and others, are evidence that the folks calling the shots are focusing on the things that spell the difference between profits and continued losses. And that the vehicles in GM’s four core brands — Chevrolet, Cadillac, Buick and GMC — are wooing enough new customers to keep market share relatively steady, despite jettisoning Saab, Saturn, Hummer and Pontiac.

"We’re actually making money at 11 million units or a little above," Chief Financial Officer Chris Liddell said in a just-the-facts conference call eerily free of the grand predictions and customary detail typically proffered by the GM of yore. "It’s encouraging that we delivered profitability and free cash flow. We continue to make progress."

They’d better, if they want to spark the interests of potential investors looking for signs that GM’s turnaround is underpinned by a rational, sustainable business model. That’s arguably the only way for GM to decouple from its paymasters at the Treasury Department, a tie-up that weighs on GM’s standing with would-be consumers, according to internal company data.

Job One, to borrow the industry maxim, is to maintain momentum amid uncertain economic times — volatility in Europe, slowing growth in China and Brazil, mixed signals from the U.S. market — and not succumb to the urge to declare victory long before any lasting victory is at hand.

Among the many ticks afflicting the Detroit auto culture, few are more dangerous than the tendency to take strong quarters and morph them into insidious complacency or worse, begin the clamor for payback. Which is why the champagne needs to stay on ice until a meaningful trend is established, preferably accompanied by an official date to sell GM shares in an initial public offering.

The simple fact of GM’s numbers is that they’re a snapshot of a quarter mostly unmolested by the recent volatility in equity markets, the gyrating euro, the social unrest in Greece, crosscurrents in the U.S. housing market or the Obama administration’s rhetorical broadsides against Big Bank, Big Insurance and Big Oil, among others.

In short, it’s still early. The ranks of GM’s U.S. marketing team have been shuffled, what, three times since just before the Detroit auto show. The European workout, complicated by the stresses in the euro zone, still is not complete. The direct loans to the U.S. and Canadian treasuries are paid back (not without some controversy), but GM remains a long way from independence.

What should be clear by now is that GM, shorn of so much debt and legacy obligations to union retirees, has an opportunity to reintroduce its metal and its ability to succeed to skeptical constituencies — customers, politicians, investors, the media, even some of its own employees.

How well GM succeeds will be determined by what it does, not what it says, which is why the under-promise and over-deliver ethos of the new regime is so refreshing. That’s what they did, and now they just have to do it again.

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