>GENERAL MOTORS CORP (CITI)

Initial View on Q1: Earnings Slightly Better, Cash Flow a Bit Worse

■ Q1 2009 Results — GM reported adjusted Q1 EPS of $(9.66) excluding $0.12 in charges, above low expectations for a consensus loss of $(11.05). Revenue of $22.4 billion fell short of our $25.6 billion estimate. The company no longer reports segment results on an EBT basis but now provides EBIT by segment. Total adjusted EBT came in at $(6.0) billion, slightly ahead of our $(6.6) billion estimate. GMNA reported EBIT of $(2.8) billion, a $2.5 billion decline from last
year. This was ahead of our expectation for a $3.9 billion decline in segment pre-tax profit as $2.3 billion in structural savings and pricing helped reduce pressure from $5.0 billion in profit decline related to volume, mix, commodities, and exchange. GME posted EBIT of $(1.2) billion, a year over year profit decline of $1.5 billion, which was only slightly ahead of our expectation. GMLAAM generated EBIT of $42 million, down $458 million from last year, which was also slightly ahead our estimate. GMAP posted EBIT of $21 million, a decline of $331 million. This decline was also slightly ahead of our estimate. Corporate and other now includes interest expense.

■ Cash Balances In-Line — Operating-related cash burn was $11.0 billion, including restructuring, slightly worse than our $10.6 billion estimate. Balance sheet cash balances ended Q1 at a low $11.6 billion, below our $13.0 billion estimate. Cash balances now include the Financing and Insurance segment. GM also reported $0.9 billion in debt extinguishment for a March 4 amendment to its $1.5 billion U.S. term loan due in 2013. We look for more details on this on the call.

■ Reiterate Sell — We maintain a Sell/Speculative Risk rating on the shares of GM. The company’s weak results and updated restructuring plan confirm challenging fundamentals and no resolution on stakeholder negotiations. Even if GM successfully obtains incremental government funding and equity for debt exchanges from the UAW and bondholders, shareholder dilution should be meaningful while leverage will likely remain high, with pro forma debt-to-
EBITDA at a high 3.5x.

Investment strategy
We rate GM shares Sell/Speculative Risk on deteriorating credit conditions and unappealing valuations. The company’s February 17, 2009 restructuring plan confirmed worsening fundamentals, greater liquidity needs and no resolution on stakeholder negotiations. The new plan shows that even if the company successfully obtains incremental government funding and equity for debt exchanges from the UAW and bondholders, gross leverage would remain high at above 3 times with free cash flow prospects remaining bleak until 2012. With declining share values, existing shareholders will likely share a smaller piece of a GM’s shrinking residual equity if the company restructures successfully, as result of lower conversion prices for the debt exchanges
resulting in the UAW and bondholders obtaining an even larger majority of GM's total shares. In the near term, we await progress with bondholder and the UAW debt exchanges, and the White House and U.S. Treasury Department’s response to GM’s latest appeal for an additional $9.1 billion in government support (including $2 billion in March 2009) to maintain cash balances at around $10 billion. By March 31, GM must submit to the government a certification of the plan. The President’s Designee will then determine whether these steps are sufficient to ensure long-term viability. (The designee would have authority to extend the certification date by up to 30 days.) If the designee ultimately fails to certify GM’s plan, the company then would likely file for bankruptcy protection.

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