AMERICA'S LARGEST CAR MAKERS

report quarterly earnings this week

Ford Motor

General Motors

Detroit's problems are numerous. High oil prices are stifling consumer demand for profitable sport utility vehicles. Health-care costs are enormous, and rising. And U.S. auto makers are still struggling to make passenger cars that people will buy at prices that can add to the bottom line.

These are long-term issues that'll require long-term solutions. Meantime, don't look for signs of improvement in their second-quarter results. Wall Street expects little from Ford, and even less from GM. Analysts tracked by Thomson First Call expect Ford to post earnings of 33 cents a share, a 33% drop from a year ago. The company is on track for a six-cent-per-share loss for the third quarter, a 120% drop, and for full year earnings of $1.07 a share, down 50% from 2004.

Things are worse at GM. The consensus estimate of seven cents a share for the second quarter represents a 97% drop from the same time a year ago, when GM booked a profit of $2.36 for the quarter. Third-quarter projections of a 17-cents-a-share loss are down sharply from a profit of 78 cents a share last year. Full-year estimates suggest a loss of 75 cents a share, vs. a profit of $6.40 in 2004.

The question on investors' minds: Is the struggling U.S. auto business at least nearing a bottom? As a sign of Detroit's desperation, GM recently embarked on a massive discounting program to clear out cripplingly high inventories of cars that weren't selling. Ford and DaimlerChrysler have followed suit. GM's price cuts, which offered buyers the same discount that GM workers receive on new-vehicle purchases, drove June sales up 47% from the same month a year ago, and jacked up GM's market share by 7% for the first five months of 2005, to about 33%. The initiative was so successful at unloading cars that wouldn't sell at full prices that GM extended the program through Aug. 1.

But this is hardly a solution for the long term. Selling cars at no profit to say nothing of a loss is a sure path to bankruptcy. Still, some analysts are optimistic that the price cuts will provide a temporary salve, and that auto makers will emerge healthier. "It appears that, on the heels of some very aggressive incentivizing, most of the inventory overhang should be gone by the end of summer," says Citigroup Global Markets analyst Jon Rogers.

With steel prices dropping a bit recently and relatively strong consumer sentiment, Ford and GM can concentrate on the "myriad other issues they have to deal with," Rogers says, the most pressing of which is excess manufacturing capacity. (Rogers doesn't own shares of GM or Ford; both companies are investment-banking clients of Citigroup.)

Both companies have too many plants and too many workers relative to their sales. Fortunately, these costs can be trimmed unlike Ford and GM's high legacy costs, such as pensions and health care for retirees, which add about $1,500 to the cost of every vehicle they sell.

GM announced on June 10 that it would lay off 25,000 workers by 2008 to save as much as $2.5 billion, with Chief Executive Rick Wagoner consulting the bland lexicon of corporate buzzwords to say the cuts were needed "in order to achieve full capacity utilization based on conservative volume-planning scenarios."

The job-cut news, combined with reports that the United Auto Workers will discuss possible health-care concessions in its 2007 contract, sent GM's shares up 11.5% in a single day in June. Rogers of Citigroup says analysts will be listening for GM leadership to describe its longer-term strategy, one that will likely include further layoffs, plant closings and "brand rationalization," or cutting out models that don't sell.

Ford started its discounting program after GM did, and so it won't be able to tout its discounted sales numbers fully in its second-quarter report. Goldman Sachs analyst Robert Barry on July 4 lowered his 2005 earnings estimate for Ford to $1.10 a share from $1.30, after having cut 2006 estimates to $1.20 from $1.25 on June 22. His rationale: SUV sales were down 13% for the year to date even with the discount program revving up sales.

But Ford seems to be further along in its revitalization efforts. Most impressive: It has sped up the rollout of newer models, such as cars like the 2006 Ford Fusion, Lincoln Zephyr and Mercury Milan, which will replace the Taurus and Sable this fall. Rejiggering its product mix isn't easy to do on the fly and bodes well for Ford's ability to tweak its business model down the road.

"I think Ford's revitalization plan would be a pretty good blueprint," says Rogers. "I think Ford has gone further to address the capacity issues than GM has, and they have revitalized their [product] lineup quicker than GM has. Thus far, all we've heard from GM is, 'We're going to lower prices and health-care costs are too high.'"

Because so many outside factors affect these large companies gas prices, interest rates, consumer spending levels and the price of raw materials Rogers says it may be three to five years before investors are riding high with GM or Ford.