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GM 2011 profit likely around $8 billion

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POSTED February 15, 2012 7:51 p.m.

DETROIT (AP) — General Motors was expected to post a 2011 net profit of around $8 billion — the best in its 103-year history — when it releases fourth-quarter and full-year earnings on Thursday.

With the numbers, though, will be signs of trouble in GM's European operations. The company may provide some clues on how it will deal with the struggling economy in that region, as well as its vastly underfunded U.S. pension plan.

GM, a little less than three years past government-funded bankruptcy protection that saved the company from financial collapse, is expected to top the record annual profit of $6.7 billion of 1997, when the pickup truck and SUV sales boom was in full swing. Earnings should set a new record despite total sales in the U.S., GM's second-largest market, near a historic low of 12.8 million cars and trucks last year.

WHAT TO WATCH FOR: Through the first three quarters, GM made a tidy $7.1 billion, or $4.30 per share, beating the old record for that period. Analysts polled by FactSet expect fourth-quarter earnings of $762 million, or 43 cents per share, which would mean annual profit of about $7.9 billion, or $4.73 per share. With sales expected to rise this year in GM's top two markets — the U.S. and China — GM could make even more money in 2012. But the company also has to watch its costs, which are likely to grow as sales rise.

WHY IT MATTERS: GM helps the U.S. economy when it hires workers. If auto sales rise to around 14 million this year, as expected, and GM can hold or grow its 19.6 percent market share, the company will have to add people to its U.S. factory workforce. GM has roughly 210,000 employees worldwide and 79,000 in the U.S. That's up from 202,000 worldwide and 77,000 in the U.S. at the end of 2010.

Also the government, which owns 26.5 percent of GM common stock, needs the share price to rise before it can sell its stake and recoup the money it put up to save the car maker.

GM needed a $49.5 billion government bailout to survive the Great Recession in 2009. So far the U.S. government has gotten back $22.3 billion of the original bailout. The remaining 500 million shares it owns would have to sell for around $53 each for the government to make the remaining $27.2 billion. Recently the shares have traded around $25.

EXPECTATIONS: Sterne Agee analyst Michael Ward expects GM to report a pretax profit of $7.3 billion for the year in North America, where the company performed well. GM sales in the U.S., by far the largest North American market, rose 13 percent last year. That was better than the total U.S. sales increase of 10 percent for all cars and trucks.

But there likely will be trouble in Europe, where passenger car registrations fell 1.7 percent last year as government debt and other economic troubles mounted. Ward expects GM to post a $600 million pretax loss in Europe for the full year. That will raise the sense of urgency to restructure GM's operations there. The company has already backed off a projection that it would break even in Europe before taxes this year.

CEO Daniel Akerson placed Vice Chairman Steve Girsky in charge of the European management board and is adding executives in preparation for restructuring. Factory closures and layoffs are likely but could provoke a fight with powerful labor unions. Some analysts expect GM to give an update on European restructuring Thursday.

Girsky has said GM intends to fix the European unit, made up of the Opel and Vauxhall brands, and keep it in the company. GM came close to selling the unit in 2009.

"European losses in 2011 along with additional restructuring actions could outweigh GM's progress in North America, pressuring the stock," Ward wrote in a note to investors. "GM's European operations have been in a restructuring mode for more than a decade, and the current market conditions have intensified the need for additional actions."

South America also struggled last year, with Ward projecting break-even numbers there for the full year.

GM's U.S. operations also could run into difficulty this year. The company posted its biggest sales gains in the U.S. during the first three quarters of 2011, peaking at 24.5 percent in first quarter when compared with a year earlier. But by the fourth quarter, when Honda and Toyota had recovered from car and truck shortages caused by the March earthquake in Japan, GM's sales grew only 4.4 percent, according to the Edmunds.com automotive website.

Analysts also say that the gap between GM's U.S. pension obligations and the value of its pension funds grew in the fourth quarter. At the end of September, GM's pension fund had assets that were $8.7 billion less than its obligations.

Although the funding gap could grow, Ward wrote that GM can generate enough cash to fund the liability during the next few years.

LAST YEAR: In the fourth quarter of 2010, GM made $510 million, or 31 cents per share. For the full year of 2010, it made $4.7 billion, or $2.89 per share. During the year, GM ousted Toyota as the world's top-selling automaker. GM reported selling just over 9 million vehicles worldwide.

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