Is the worst over for General Motors?
Improved results raise hopes Wagoner's turnaround plan is working, but challenges loom for the world's largest, and deeply troubled, automaker.
By Chris Isidore, senior writer

NEW YORK ( - Maybe the light in the tunnel is closer for General Motors than you think. Or maybe the light is still the headlight of an oncoming train.

GM's results seem to have easily topped forecasts for the first quarter, with the troubled automaker posting a profit excluding special items rather than the loss Wall Street analysts had forecast. GM got a boost from improved pricing and strong sales for its new big SUVs in the quarter.

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For a company dogged by a sliding share of the U.S. market, high costs compared to its Japanese competitors, and even speculation about a possible bankruptcy filing (which GM has denied), it was a much welcome break in the dark clouds.

Investors took notice, and sent GM (down $0.40 to $22.24, Research) stock soaring about 10 percent on the New York Stock Exchange, which helped drive the Dow Jones industrials to a 6-year high.

But a turnaround at GM is important not just for the company's stockholders. Even Americans who've never driven a Chevrolet or GM pickup truck are affected by the shadow that the nation's third-largest company casts over the economy.

Still, some skeptics said it's far from clear that GM is on the road to recovery.

"The quarter as a snapshot is certainly a move in the right direction. But that being said, it didn't convince me of anything," said Kevin Tynan, auto analyst at Argus Research, who has had a sell recommendation on the stock since late 2004.

Tynan said it's possible that some day the quarter will be looked at as a turning point for GM, but before that assessment can be made, the automaker must deal with a strike threat at its largest supplier and the high gasoline prices expected later this year.

"It's too soon to say that (GM turned the corner)," Tynan said. "There are certainly potholes still out there to negotiate."

Much rides on turnaround

Even with plans to cut staff and close a dozen plants and facilities, GM will continue to provide more than 100,000 good-paying jobs to its workers, and many more indirectly through the business it gives companies that ship parts and other products to the world's largest automaker.

A GM bankruptcy - and many analysts say that may be inevitable - would be a severe blow to the nation. The company pays active U.S. employees well over $10 billion, and nearly a half-million retirees and surviving spouses get another $6 billion a year.

And despite U.S. market share losses that have taken it down to less than quarter of sales here, and left Toyota (Research) nipping at its heels for the title of No. 1 worldwide, GM is almost certain to remain the largest source of vehicles for U.S. car buyers for years to come, if not longer. And it has by far the largest dealership network.

For about a year the company's been dogged by speculation it may eventually file for bankruptcy in an effort to shed some of its high-cost pension and other obligations, even as top executives have repeatedly denied they had any such plans.

The talk of a possible bankruptcy has scared away some buyers, but no one knows how many. An actual bankruptcy would hit sales even further.

Black ink in the current quarter?

While the company still won't give guidance about when it expects to return to the black, many analysts say things are turning around sooner rather than later.

Of the 13 analysts with quarterly forecasts for the rest of this year, nine are forecasting profits for GM in the second and fourth quarters. The third quarter, when automakers shut plants to shift production to the new model year, typically is less profitable.

In addition, 16 of the 17 analysts forecasting 2007 results see the company back in the black by next year, with a consensus forecast for profits of $1.85 a share. The group is looking for a loss of loss of only 36 cents a share for all of 2006, excluding one-time items, which itself would be a large improvement from the $5.99 a share GM lost on that basis in 2005.

But the company faces many challenges before it can live up to those relatively optimistic forecasts.

First among them is the negotiations between GM, the United Auto Workers union and the bankrupt auto parts supplier Delphi, formerly owned by GM.

"The one major thing we still don't have closure around is the Delphi situation, and because of that we're still not in position to provide guidance for the year," GM Chief Financial Office Fritz Henderson said on a call with industry analysts Thursday.

Delphi still major risk

Delphi has asked the bankruptcy court to throw out its union contract, and the UAW has vowed a long strike if that request is granted. Such a strike would quickly force GM to shut down its factories and could lead to a GM bankruptcy. GM says it now expects to spend at least $5.5 billion to help reach an agreement at Delphi, but that could go as high as $12 billion.

Henderson conceded that even with GM slashing losses in its domestic auto business and making a profit on auto operations overseas in the quarter, it still clearly isn't out of the woods.

"I wouldn't say we're satisfied with any of the results," he told investors Thursday. "We can do better in all of them. But when you look at where we've come from, I think there are signs the turnaround plans are working around the world."

Some analysts and experts were not as convinced the first quarter was the sign of that turnaround, though.

"This quarter seems to be consistent with demonstrating 2006 is going to be better than 2005," said Bob Schulz, the chief auto credit analyst at rating agency Standard & Poor's. "But it needs to be, given how difficult '05 was."

GM's net loss was $10.6 billion last year, the biggest since 1992.

Large vehicles, high gas prices

Some of the advantages GM saw in the first quarter will be tough to repeat. First, it introduced a new line of large SUVs and saw strong sales prices on the new models.

"We knew this would be a key part of our turnaround strategy for North America," Henderson said of the new SUVs. "We were counting on this being a hit with customers. The first indication is that it is."

But he admitted such strength typically ebbs after new models are introduced, adding the company was planning for that and has a number of other important introductions set, including new large pickups in the second half of the year.

Much tougher to estimate is the effect that rising gasoline prices could have on the new SUV and pickup models. Some experts say $3 gas may be around for awhile this summer, rather than the short blip that brought national averages above that mark right after Hurricane Katrina last year.

Henderson and other GM executives insisted the company won't be hurt by high gasoline prices, saying its big SUVs and pickups have the best fuel economy in their class.

"Typically the people who want full-size sport utilities and pickups want them for a reason and those needs are not fulfilled by any other vehicle," said Henderson. But he added: "Would I say are we concerned? Yes. It's something we watch very very carefully."

Turning off the GMAC spigot

The other big issue is GM's move to sell a 51 percent stake in its most profitable asset - the GMAC finance unit. That unit contributed $605 million to profits in the first quarter. Take away half that money and the $152 million profit GM made excluding items in the first quarter becomes a loss of about the same amount.

Still, GM says the loss of some GMAC profits will be balanced out since it hasn't seen most of the benefits of things like health care spending and cuts in staffing negotiated with the UAW. The health care changes alone are expected to boost profits by $3 billion a year before taxes.

For a closer look at GM's first quarter results, click here.

For a FORTUNE's in-depth look at the tragedy of GM, click hereTop of page

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