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Good Year For GM, But Investors Worry About Oil Price Impact

Even GM Europe Makes Some Progress

General Motors had its best year for more than a decade, but investor’s reaction was muted by worries that rising oil prices might persuade Americans to buy more fuel efficient, cheaper cars with low profit margins.

Even financially strapped GM Europe had some good news to report. Its EBIT losses for 2010 were contained at $1.76 billion, beating the most recent forecast of red ink totaling $1.9 billion, and compared with the initial forecast of a $3 billion loss at the start of 2010. GM Europe hopes to break even in 2011.

GM itself earned net income of $4.7 billion for 2010, its best performance since 1999 when the bottom line was fuelled by a scramble to buy high margin SUVs. |In the fourth quarter of 2010, GM earned net profit of $510 million, compared with a loss of $3.5 billion in the same period last year. Sales in the quarter rose 14 per cent to $37 billion.

It is now almost two years since GM went bankrupt. Last November,  GM was relaunched on stock markets, when the U.S. government sold some of its shares, cutting its stake from 61 per cent to 26.5 per cent. Canada and the United Auto Workers union have small stakes.

Europe weak
U.S. ratings agency Standard & Poors said GM’s EBIT profit margin in the fourth quarter was 2.7 per cent.

“We believe GM’s consolidated global automotive operations should generate at least mid-single digit EBIT margins, including Europe, where the market remains weak and GM’s operations are unprofitable,” S&P said in a statement.

S&P didn’t say when though.

“Factors we continue to monitor include the potential for gas prices to rise more sharply, which would likely shift the mix of vehicles sold to less-profitable products, and the ability of GM and other automakers to maintain discipline regarding production, inventory levels, and incentives,” S&P said.

The slimmed-down version of GM shorn of Saturn, Pontiac, Hummer and Saab has pleased investors with its progress. Later this year there is a new test for GM in the shape of contract negotiations with the United Auto Workers union. Will the UAW seek to grab back wages and benefits lost during the bankruptcy, or will it, as a shareholder, want a deal which protects GM, and its own investment?

Neil Winton – March 1, 2011

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