Subprime woes bite General Motors

No. 1 U.S. automaker sees gains in auto profits, but earnings fall well short of forecasts following losses in subprime mortgages.

By Chris Isidore, senior writer

NEW YORK ( -- General Motors Thursday reported improved results from its auto operations in the first quarter, but problems in subprime mortgages contributed to earnings that missed Wall Street forecasts by a mile.

The nation's No. 1 automaker said it earned $94 million, or 17 cents a share, excluding items in the quarter, compared with adjusted earnings of $350 million, or 62 cents, a year earlier.

Analysts surveyed by earnings tracker First Call had forecast earnings per share of 87 cents. The range of estimates was from 34 cents to $1.40 a share.

Net income for the quarter tumbled 90 percent to $62 million, or 11 cents a share, including special items, from $602 million, or $1.06 on that basis a year earlier.

While the company's finance arm GMAC had reported Wednesday afternoon that it had nearly $1 billion in losses on its mortgage business, primarily due to subprime mortgage problems, the analysts' forecasts had all published their estimates well before that announcement.

Subprime mortgages have gotten a lot of attention in recent months and GMAC's significant subprime mortgage business was well documented. But the extent of the loss from that business seemed to catch analysts by surprise.

"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.

GM (Charts, Fortune 500) stock sank $1.25, or nearly 4 percent to $31.09 in late morning trading on the New York Stock Exchange.

The problems weren't all in subprime mortgage, though. While GM reported an adjusted $304 million in income from its auto operations worldwide, up from $40 million a year earlier, losses continued its core North American auto operations. That key unit lost $85 million in the quarter, a disappointment even if it was an improvement from the loss of $251 million a year earlier.

The first quarter loss in North America was far larger than the $14 million it lost at that unit in the fourth quarter, and while the company's statement referred to the result as a sign of continued improvement, Henderson said it was not acceptable.

"We were at or around break even," he said. "That's not our goal obviously, and not a number we're satisfied with."

David Healy, auto analyst with Burnham Securities, said that he had been hoping for GM to show enough improvement in its cost cutting efforts to post a profit in North America in the period, and that the loss is disappointing. He said the company's shortfall can't be completely blamed on the problems in subprime mortgages.

"Without the impact of GMAC, they might have been close to the 87 cents [consensus forecast] but they would not have been there," he said.

GM recognized a net loss of $115 million associated with its 49 percent ownership of GMAC, the finance arm that it sold a 51 percent stake in late last year. GMAC announced Wednesday afternoon that it saw a net loss of $910 million in its mortgage business in the quarter, versus net income of $495 million a year earlier.

GM posted record sales on strong overseas results despite weakness in its core North American market, mainly from reduced sales to rental car companies. But it fell behind rival Toyota Motor (Charts) in global sales in the quarter for the first time.

Auto revenue fell to $42.9 billion from $43.6 billion, but came in better than the $40.9 billion average forecast from First Call. While auto revenue fell 8 percent in North America, it gained in the company's other three regions, climbing 5 percent in Europe, 13 percent in South America, Africa and the Middle East, and 35 percent in the Asia-Pacific region. It gained market share in each of the regions outside the United States.

Total revenue sank to $43.9 billion due to GMAC no longer being included in the total, from $52.4 billion a year ago when the finance arm still contributed to the top line.

Although below Wall Street's estimates, GM's results were better than losses at rival Ford Motor (Charts, Fortune 500), which last week reported a loss of $171 million in the quarter, excluding items. DaimlerChrysler (Charts) has yet to report results. Top of page