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GM shares rise on cost savings outlook

Business Materials 19 January 2008 05:58 (UTC +04:00)

( Reuters ) - Shares of General Motors Corp rose 3 percent on Friday, a day after the automaker said it plans to cut annual U.S. labor costs by $5 billion in the next three years to help improve its earnings.

In a conference call with analysts, the largest U.S. automaker said on Thursday the labor contract it reached with the United Auto Workers union late last year - which allows GM to shift hourly retiree health-care liabilities to a trust fund and hire new workers at lower pay - would be the primary driver of the savings.

GM shares were up 69 cents to $23.53 in morning trade on the New York Stock Exchange. The shares have lost more than 40 percent of their value since their recent high in mid-October, when the stock was buoyed by the landmark cost-saving labor deal with the UAW.

"Near-term macro concerns likely to keep stock under pressure, but we continue to like GM long-term, given substantial UAW contract savings potential," JP Morgan analyst Himanshu Patel wrote in a note to clients on Friday.

U.S. auto sales fell for the second consecutive year in 2007, dragged down by a slowing economy, a slumping housing market, and tighter credit markets that pinched less credit-worthy borrowers.

While the consensus view among Wall Street analysts and high-profile investors points to a further decline in the world auto industry's largest market in 2008, there is debate about how deep it will go -- especially if the U.S. economy tips into recession.

Full-year 2007 sales dropped almost 3 percent to 16.14 million vehicles, the lowest level since 1998 and down from 16.55 million a year earlier.

GM Chief Executive Rick Wagoner, more optimistic than many other industry experts and analysts, has said he expects total U.S. industry sales to come in at 16.3 million to 16.5 million vehicles in 2008.

But Wagoner also said on Friday that current industry volumes would force GM to cut its U.S. capacity further, a move welcomed by Wall Street.

"We would view this as a very positive development if GM were to seek to use the economic downturn to further cut its cost base," Lehman Brothers analyst Brian Johnson said in a research note to clients on Friday.

GM also said it expects to launch a second phase of buyouts in February, offering retirement incentives to 46,000 hourly workers -- more than half of its 73,000 unionized workers.

The buyouts would allow GM to bring in new workers at roughly half the wage rate of current union employees.

Analysts remain concerned about GM's exposure in ResCap - the residential mortgage unit of GMAC, GM's former finance arm, in which it retains a 49 percent stake.

ResCap, the second-largest independent U.S. mortgage lender, lost $2.26 billion in the third quarter, hurt by rising defaults and tighter credit markets as the U.S. housing crisis deepened.

"Overall, we continue to believe GM has strong earnings prospects for 2010 and beyond but remain cautious near-term as the economy deteriorates and the ResCap overhang (justified or not) remains," Lehman's Johnson said.

Brokerage firm Bear Stearns on Friday cut its earnings estimates for GM to $1.40 a share from $2.15 for 2008, and to $2.80 a share from $3.95 for 2009.

"We believe these views are increasingly difficult to defend," the firm said, referring to GM's view that a U.S. recession is unlikely.

Bear also noted that new federal regulations, which require automakers to increase fuel economy to an industrywide 35 miles per gallon by 2020 - a 40 percent increase over current levels -- could wipe out some of the labor cost savings.

GM has said the new regulations will add, on average, $6,000 to the price of GM vehicles sold in the United States.

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