GM had a big miss - but so did Wall Street

NEW YORK (CNNMoney.com) -- The nation's big automakers and Wall Street auto analysts could probably drive head on and not get killed right now - because they'd miss each other by a mile.

General Motors (Charts, Fortune 500) posted first-quarter earnings on Thursday that fell 80 percent short of the consensus forecast from earnings tracker Thomson First Call. That follows a fourth quarter when GM missed forecasts by 73 percent. In last year's second quarter GM profits trounced the consensus by 267 percent. And these were the close calls compared to the second quarter of 2005, when GM missed forecasts by 1,729 percent.

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Meanwhile, Ford Motor (Charts, Fortune 500) reported a loss of 9 cents a share excluding items, less than a sixth of the average forecast. The second quarter of last year saw a miss of 124 percent, while in the fourth quarter of 2005 it topped forecasts by 2,263 percent.

The disparity between expectations and results has come when both automakers are struggling to stem large losses in their core North American auto operations. During those struggles, neither company has given any kind of guidance or warnings to Wall Street.

So industry analysts have to sift through a mountain of raw numbers as they devise their estimates - many more than are readily available in many industries. U.S. sales of different models, spending on incentives, the time factories are running or temporarily shutdown, for example.

But there are many important things that are harder for them to calculate, such as raw material costs, currency fluctuations, unexpected production swings and results from overseas - not to mention the company's finance operations, which is what stung GM in the latest quarter.

"By not giving guidance, it makes it harder for analysts to fill in all the pieces," said Efraim Levy, auto equity analyst at Standard & Poor's, who had forecast a 77 cent a share profit for GM in the most recent quarter.

"Especially with the volatility of production, automotive forecasting itself is difficult. There are a lot of moving parts and small changes in one area can have a big effect. I don't feel so bad missing on an auto manufacturer's estimate as I would an auto retailer, which is more predictable."

A big part of GM's results had almost nothing to do with car sales or automaking. It had to do with the subprime mortgages of its finance arm, GMAC.

GMAC reported Wednesday afternoon that it had nearly $1 billion in losses on its mortgage business, mainly from subprime mortgage problems, but analysts had all published their estimates well before that announcement.

Subprime mortgages have gotten a lot of attention in recent months and GMAC's big subprime mortgage business was well documented. But the extent of the loss from subprime apparently caught analysts by surprise, probably because GMAC had been churning out profits for GM despite losses in its core auto business. Many analysts had modeled for some income from the 49 percent of GMAC that GM still owns, rather than a loss.

"Frankly, I don't think that was fully factored in," said GM Chief Financial Officer Fritz Henderson on a conference call with analysts and journalists.

Of course big earnings misses, both positive and negative, and lack of company guidance aren't restricted to automakers. John Butters, a research analyst for First Call, said the number of companies offering guidance shot up at the end of 2000, when so-called Reg FD from the Securities and Exchange Commission went into effect, requiring companies to share equally with all investors any material information that they gave out about their results.

After that spike, companies started going in the other direction and giving out less and less information, Butters said.

Partly because of that the number of companies beating consensus forecasts has risen fairly steadily, Butters said, to 67 percent in the fourth quarter of 2006 from 55 percent in the first quarter of 2001, while those missing forecasts is also up to 19 percent from 15 percent six years ago.

David Kelly, economic advisor for Putnam Investments, said that with greater uncertainty about results and guidance, analysts are more likely to underestimate a company's earnings rather than publish a high number that the company might miss. He said that's the reason companies are finding it easier to top forecasts.

"The real question isn't why the companies are releasing these numbers as it is what the analysts are predicting," he said. "There's a real downward bias."

Kelly said the lack of guidance is one reason GM shares were not punished more severely after its big miss, though the stock did slide about 5 percent.

Even GM couldn't say Thursday what the loss at GMAC meant to GM's results on a per share basis. Most analysts said weaker North American sales had been part of the problem. But some had expected the company to finally make money on its auto operations here for the first time since 2004.

And they're now struggling to figure out where GM earnings go from here. S&P's Levy cut his recommendation on GM stock to sell from a hold, and his full-year earnings forecast by almost a dollar, to $2.85 a share from $3.83. The first quarter shortfall is only part of that change. Uncertainties about subprime mortgages going forward are another part of the problem.

"Things like this don't turn around overnight," he said.

David Healy of Burnham Securities said GM needs to step up the pace of its cost-cutting efforts, and its sales. "The cost-cutting is coming along slower than they expected," he said. "They damn well better be making money in the second quarter."