GM beats second-quarter estimates

General Motors CEO Rick Wagoner answers questions in Detroit, Michigan October 4, 2006. General Motors Corp on Tuesday said it flipped to a second quarter net profit, beating Wall Street estimates as it benefited from cost-cutting, a better mix of products and growing sales overseas.

DETROIT (Reuters) - General Motors Corp. (GM.N) on Tuesday said it swung to a quarterly profit that trounced Wall Street estimates as it benefited from cost-cutting and growing sales overseas, sending its shares higher.

GM posted a second-quarter profit of $891 million against a massive $3.4-billion loss a year ago, bolstered by gains in Europe, Latin America and Asia, sales of higher-margin vehicles and a one-time, tax-related gain.

The automaker also sharply narrowed its losses in its troubled home market, but vowed to keep the pressure on costs, the overriding issue in a crucial round of ongoing labor talks with its major union.

Despite signs of recovery for the No. 1 U.S. automaker, analysts said GM would face a tough second half as stiff competition and a weak U.S. housing market raise the stakes for automakers to roll out new sales incentives.

Shares of GM were up 1 percent at $32.91 in afternoon trade on the New York Stock Exchange, off early gains that sent the shares up as much as 6 percent.

Excluding some one-time items such as charges related to the bankruptcy of parts supplier and former subsidiary Delphi Corp. DPHIQ.PK, GM said it had earned $2.48 per share.

Those adjusted earnings included 19 cents per share in earnings from subsidiary Allison Transmission, which GM is spinning off in a deal expected to close this quarter. The headline figure also included a $401-million gain as GM reversed previously booked tax liabilities.

But even stripping out those items, analysts said GM beat both the average Wall Street forecast of $1.08 per share and the most bullish forecast at $1.64 per share, as tracked by Reuters Estimates.

"While never an easy release to navigate, it appears to be a clean beat," Bear Stearns analyst Peter Nesvold said.

Lehman Brothers analyst Brian Johnson attributed GM's stronger-than-expected showing to a better performance at GMAC -- its former finance arm in which it retains a 49-percent stake -- and strong earnings in markets outside North America.

Overall revenue from auto operations rose to $45.9 billion, up nearly 2.5 percent from $44.8 billion a year earlier.

GM, which had lost more than $12 billion in the past two years, is in the middle of a sweeping restructuring that includes slashing more than 34,000 jobs and closing 12 plants in North America.

For the second quarter, GM's North American net loss narrowed sharply to $39 million from $3.95 billion a year earlier when it took charges for its attrition plan.

CFO: KEEP THE PRESSURE ON COST-CUTTING

GM Chief Financial Officer Fritz Henderson said GM needed to keep up the pressure on cost-cutting, including taking steps to reduce its $4.8 billion annual health care bill.

All three Detroit automakers -- GM, Ford Motor (F.N) and DaimlerChrysler AG's DCXGn.DE> soon-to-be private Chrysler Group -- have begun talks with the United Auto Workers union to replace a contract that expires September 14.

The companies are seeking major concessions, particularly in health care, to bring their factory labor costs in line with Japanese rivals led by Toyota Motor Corp. (7203.T).

JP Morgan analyst Himanshu Patel reiterated his "overweight" rating on GM, citing "potential for sizable labor concessions, particularly a Goodyear-style healthcare deal."

Goodyear Tire & Rubber Co. (GT.N) in December agreed to set up a health-care trust with a one-time $1 billion payment to free the company from future retiree health-care obligations.

GM's Henderson declined to comment on the prospects for such a deal for GM or other aspects of the UAW talks.

Analyst attention has focused in part on how GM might finance such a trust fund to eliminate the estimated $54 billion liability it faces for retiree health care.

GM ended the quarter with $27.2 billion in cash, including $3.6 billion in assets in a trust fund for employee health care expenses. It also expects to raise $5.6 billion from the Allison sale.

"I would say we're certainly operating above our minimum cash requirement today," Henderson said. "We've done as good a job as we can in terms of monetizing the assets ... to give us the maximum flexibility. Beyond that, stay tuned."

Still, analysts remain cautious about the outlook for auto sales through the rest of the year.

"In light of the significant excess inventories of GM's full-size trucks, we remain concerned that there may be some payback in (the second half of 2007)," Lehman Brothers analyst Brian Johnson said in a research note.

Henderson also cautioned that GM expected the gains it made from selling more high-margin vehicles, including pickup trucks, to ease in the second half of the year.

GM has rolled out zero-percent financing offers aimed at boosting full-size pickup truck sales in July, and will count those costs in the third quarter.