Moody's May Upgrade GM Credit Rating

Moody’s Investors Service, the credit rating agency of Moody's Corporation (MCO - Analyst Report), may possibly upgrade the credit rating of General Motors Co. (GM - Analyst Report) based on its improved finances and expected ratification of a new four-year contract with the United Auto Workers (“UAW”).

Currently, GM has a corporate family rating of Ba2 and a secured credit rating of Baa3 from Moody’s. Both the ratings are several notches below investment grade. GM was dropped from the investment-grade ratings in 2005, when it was incurring huge losses.

Under the tentative agreement with UAW, GM agreed to pay a $5,000 signing bonus per worker under the new agreement, which was less than the $8,000 to $10,000 demanded by the union. The bonus payment would cost about $242.5 million to the automaker.

Terms of the four-year agreement are yet to be ratified. GM expects the union to hold ratification votes within few days. Moody’s expects the contract will allow GM to remain competitive in North America.

GM, a Zacks #3 Rank (Hold) stock, posted a profit of $2.54 billion or $1.54 per share in the second quarter of the year, which almost doubled from $1.33 billion or 85 cents per share in the same quarter of 2010. With this, the automaker has beaten the Zacks Consensus Estimate by 33 cents per share.

Revenue in the quarter appreciated 19% to $39.37 billion (including $330 million from GM Financial) on worldwide sales of 2.32 million units versus 2.16 million a year ago, thereby capturing a market share of 12.2%. It also exceeded the Zacks Consensus Estimate of $36.61 billion.

Operating income rose to $2.45 billion from $1.90 billion a year ago. Earnings before interest and tax (EBIT) was $3.0 billion (adjusted) compared with $2.0 billion in the second quarter of 2010.