There are indications the US car industry can sustain a moderate rise in incentives, JP Morgan analyst Himanshu Patel said on Wednesday, according to Dow Jones.

Patel reportedly said in a research note that General Motors posted only a small drop in its profit margins in 2003, from 6.2% at the peak of the industry in 2000 to 5.5% in 2003.

“GM’s relative underlying margin stability since 2000 suggests that the US industry (and GM in particular) has been able to significantly offset chronic pricing pressure with cost cutting and enrichment,” he said in the note, adding: “As such, we think a modest level of future incentive growth, while not desirable, is tolerable by the industry.”

According to Dow Jones, Patel said rising pension and healthcare costs have hurt the carmaker’s bottom lines, masking an underlying strength in profit margins.

“By no means are we implying that pension and healthcare costs are somehow artificial and that they need not be considered in a company’s valuation,” he said. “In the case of the Big Three, these are clearly integral parts of the equity story.”

Still, GM’s underlying profit has been resilient, the analyst said, according to the report. When the effects of pension and healthcare are taken out, GM’s 5.5% 2003 profit margin is higher than the company’s 10-year average of 5.2%.

“In our view, this reported and underlying margin comparison seriously calls into question the conventional wisdom in the investor community surrounding the recent US incentive battles,” Patel wrote, according to Dow Jones.

Regarding Ford, Patel reportedly said pension and healthcare costs have hidden improvements in the company’s profitability.

The report said that, excluding those costs, Ford’s pre-tax profit margin came in at 5.8% in 2003, compared with 11.3% in 2000.

While that’s a steeper drop than GM’s, it’s reportedly better than figures most investors have been using. Most have been looking at the pre-tax margin, including pension and healthcare costs, which was 2.1% in 2003, compared with 9.9% in 2000.