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General Motors Co (GM-N) offered investors a disappointing outlook for the upcoming six months in North America, raising questions about the economy's recovery and sending its shares lower.
While the world's largest automaker posted a first-quarter profit that surpassed forecasts, the outlook for its key market fell short of expectations. GM's results echoed those of smaller rival Ford Motor Co (F-N), which last week also posted a stronger-than-expected profit, but offered a disappointing forecast.
GM's North American results in the first quarter were also shy of Wall Street's expectations.
"Economic growth may be moderating to some degree," said Josef Schuster, president of iPox Schuster, which owns GM shares. "It's going to hit GM in terms of sales and revenue outlook."
GM executives said the U.S. economy was getting better, but in fits and starts.
"We're clearly seeing some improvement in the economy," Chief Financial Officer Dan Ammann told reporters on Thursday. "It's a modest underlying improvement, but it's patchy and it won't necessarily all go in a straight line."
GM said it expected its core North American results in the second and third quarters to largely match the first quarter due to scheduled downtime at its large truck plants. Citi analyst Itay Michaeli said the outlook implied adjusted earnings in North America in the first nine months of $5.1 billion US, well short of the $5.6 billion he was expecting.
FIGHT FOR SALES
Edward Jones analyst Matt Collins said U.S. demand should continue to rebound as long as unemployment keeps falling and housing recovers, but pressure on the industry will only grow.
"Unfortunately for GM and Ford, the competition is as tough as ever," he said. "Everybody wants a bigger piece of the U.S. market, so they'll have to fight for every sale."
GM's first quarter benefited from $800 million in higher vehicle pricing and lower consumer incentives, half of which came in North America. Last year, GM offered heavy consumer incentives to drive sales in the U.S. market, something it did not do this year.
North America has been driving results for much of the industry this quarter, three years after faltering sales in the U.S. market led GM and Chrysler Group LLC to file for government-funded bankruptcy.
Parts maker Lear Corp (LEA-N) on Thursday posted a stronger-than-expected profit due to North American demand. Last week Ford posted a profit of $1.4 billion, also on better demand.
Excluding one-time items mostly related to pension accounting in Europe, GM reported a profit of 93 cents per share. Analysts on average expected 85 cents, according to Thomson Reuters I/B/E/S.
Net income fell to $1 billion, or 60 cents a share, from $3.15 billion, or $1.77 a share, in the same quarter a year earlier. Last year's quarter included a one-time gain of $1.5 billion related to the sale of stakes in Delphi and Ally.
Revenue rose 4.4 percent to $37.8 billion, above the $37.59 billion analysts had expected.
GM's North American unit saw earnings jump 35 percent to $1.69 billion, but that missed Wall Street's forecasts.
While profit rose, GM's share of the North American market fell to 16.7 percent from 18.3 percent last year. GM and Ford have both said they were willing to forfeit market share to maintain profits. By maintaining higher vehicle prices, GM improves resale values, making its vehicles more attractive to buyers.
However, analysts said results for the Detroit company's three international units topped expectations.
OPEL: A WORK IN PROGRESS
Europe, which has struggled to return to profitability, posted a loss of $256 million. However, the loss was smaller than analysts had expected and an improvement from the previous quarter's $562 million loss.
"Europe remains a work in progress," GM Chief Executive Dan Akerson said. He said he hopes more details will be provided about a turnaround plan for GM's Opel unit in Europe in the next few months.
Ammann said GM has been aggressively cutting costs in Europe. In a letter to employees, Opel chief Karl-Friedrich Stracke said GM had topped plans for cost cuts in raw materials in the quarter.
Investors have been focused on the turnaround at Opel, which GM opted to keep in 2009 after halting a planned sale.
In November, Akerson signaled his growing impatience by naming Vice Chairman Steve Girsky to head the supervisory board at Opel, which posted a $747 million loss last year. Girsky said last month he believes the weak European auto market has bottomed out.
Opel's 20-member advisory board has been exploring ways to cut costs, including taking a 7 percent stake in PSA Peugeot Citroen and forming an alliance with the French automaker to help find more than $2 billion in annual cost savings. Speculation also has centered on the possibility of plant closures at Opel, something worker unions have vowed to resist.
GM's international operations, which include China, saw profit slide about 10 percent from last year to $529 million.
In South America, GM returned to a profit of $83 million after a loss of $225 million the previous quarter as it has begun rolling out new vehicles there. It had a similar profit in the same quarter last year.
Akerson warned, however, that challenges remain in the region and earnings there will be volatile from quarter to quarter this year. Girsky said last month GM will reverse 2011 losses in South America and turn a profit this year.
GM ended the quarter with total automotive liquidity of $37.3 billion, largely unchanged with the end of 2011.
Akerson declined to address in detail reports that GM is seeking a stake in Japanese truck maker Isuzu Motors. "Don't always believe what you read," he said.
GM's stock fell as low as $22.20 on Thursday. Following the automaker's bankruptcy reorganization, GM shares debuted at $33 in its November 2010 initial public offering.