At General Motors, Loss Reduction Is a Good Start

On Monday, Nov. 16, General Motors CEO Frederick A. "Fritz" Henderson will give the company's first update since it emerged from bankruptcy in June. The news is supposed to be good—relatively speaking.

Sources close to management who have seen the preliminary financials, but who asked not to be named, say GM will show much-improved third-quarter earnings and cash flow. The company will still be in the red, according to the sources, but will have cut losses from recent quarters by billions of dollars.

Even a slight loss would be big progress for GM. The company lost $6 billion in the first quarter—the last quarter GM reported before going bankrupt—and it lost $31 billion last year. In the third quarter of 2008, GM lost $4.2 billion, including one-time charges.

GM will show improvements in cash flow through lower costs and better net pricing on its cars, the sources say. That tracks the kind of improvements rival Ford Motor (F) showed on Nov. 2, when lower costs and high sticker prices added up to a surprise $1 billion profit.

Striking Distance of Breakeven?
"GM is stabilizing, but it's not stabilized," says longtime industry watcher Joseph Phillippi, principal of AutoTrends, a New Jersey consultancy. "The new cars are doing well."

In fact, the sources maintain that GM was within striking distance of breaking even in the third quarter, not counting charges for special items and restructuring costs.

Improved numbers would be a relief for Henderson, who is under pressure from new Chairman Edward Whitacre and GM's board to show results.

The company's earnings and cash flow will be helped in the quarter by the fact that it shut down many plants in June while it was in bankruptcy. To give dealers new inventory, factories had to crank back up when the company emerged. That will help earnings because carmakers book revenue as soon as a car heads off the assembly line for a dealership.

At the same time, the company is still paying out union health-care costs. The company has set up a Voluntary Employee Benefits Trust, or VEBA, to pay union health-care benefits the way a pension fund pays pension benefits. But that plan hasn't kicked in yet, so GM's profitability won't show improvement from the VEBA deal until next year