General Motors Common shares (GM): Unsafe at any price?

Here are five new concerns for investors regarding GM’s reported financial performance and near-term future prospects Photo: General Motors Stock

New York, March 3, 2013 - In 2012, the Democrat Party sold the voting public a tale of heroic progress at GM that seems, upon closer review of the Company’s recently released Annual Report on Form 10-K, to be worse than simply climate-warming hot air.

Today it seems impolitic to criticize GM and our elected officials, but In the past, progressives built careers and earned widespread acclaim when they spoke up.

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Ralph Nader warned the public in 1965 that the Chevrolet Corvair was “unsafe at any speed.” In 1989, Michael Moore produced a documentary that called out Chairman Roger Smith for heartlessly down-sizing production in Flint, Michigan at ruinous cost to workers, their families and the wider community.

More recently, new critics of GM have become increasingly vocal, but now it seems fair to shine a different beam on the management and principal U.S. shareowners of GM for appearing to orchestrate a dangerous and possibly deceptive “rescue” scheme in face of stubborn and particularly inconvenient financial truths.

Here are just five new concerns for investors regarding GM’s reported financial performance and near-term future prospects.

(1) The Evident Failure to Generate Robust Operating Profit and “Free Cash Flow” in Automotive Operations Despite Having Received Extra-ordinary Government Support. According to GM, the Company generated an operating loss of $ 4.0 billion on revenues of $ 150.3 billion in 2012. Revenues growth was less than 1.0 % in 2012 over 2011, while GM’s slim automotive operating profit margin of 4.2 % in 2011 plummeted to a negative 2.6 %. Free cash flow from operations in GM’s combined automotive businesses did increase from $ 1.3 billion in 2011 to $ 1.5 billion in 2012. However, these levels were just 0.9% of automotive sales in 2011 and only 1.0% in 2012—barely enough to cover the $ 0.9 billion paid each of those years to owners of GM preferred shares. At surface level, these figures cast into doubt whether GM’s vehicle production activities have actually been “right-sized” to a point where experienced investors would agree there is reasonable grounds for optimism.

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(2) The Basis of Presentation in GM’s Financial Disclosures Appears to Obscure Deeper Analysis of Trends that seem Material to Investors and to Taxpayers. GM’s consolidated statements and supporting segment level disclosures do not allow the public to see full financial results inside the two nations that have provided the most financial assistance to the attempted turnaround: the United States and Canada. With regard to production trends, GM does not provide detailed unit breakdowns by vehicle type nor does the Company give visibility into where the vehicles its dealers sell are sourced. While GM does note disparities in profitability arising among types of passenger cars and types of trucks, the Company does not give a fair picture of the magnitude of these differences. Thus, it is not possible to tell how much of GM’s net profit and free cash flow is derived from manufacturing and selling trucks and SUV’s or how much money may be drained by manufacturing smaller passenger vehicles including the Chevy Volt.

(3) The potential to return dividends to GM shareowners from cash flows building out China, India and other “growth” markets appears Limited though Prospects in these areas are Touted as being Bright. GM does not have 100% ownership of businesses addressing the largest growth markets in which it operates. As elsewhere, the vehicle manufacturing industry is capital intensive and financing growth consumes capital. Further, GM’s partners in these growth markets eventually will turn their ambitions to the United States and to Europe where GM and established competitors already suffer intense competition, potentially eroding amicable relations. Finally. it is not possible to tell from GM’s disclosures whether the Company stands to benefit as much as its far better positioned local partner in China should that key market regain a more rapid growth trajectory.

(4) To Record a Net Profit After Taxes in 2012, GM Seems to have Taken an Aggressive Corporate Income Tax Benefit, Significantly Larger than its Reported Pretax Loss. The question of what political motives prevailed in the GM bankruptcy and subsequent re-emergence as a publicly traded entity is intensely partisan.

There are many points of view concerning the reasonableness with which different classes of creditors were treated in bankruptcy and the fairness of letting New GM avail itself of tax losses generated before bankruptcy. Curiously those on the left who have joined me in criticizing General Electric for its mind-bending corporate income tax acrobatics have yet to bleat about GM’s artful manufacturing during 2012 of $ 4.6 billion in net income (before equity income and investment gains) from $ 30.2 billion in pretax losses. Overall, the “quality” of GM’s reported net income seems lacking in enduring substance.

(5) GM Remains Dependent upon Credit-Challenged End-Use Customers, Dealers and Corporate Financing Sources even as Economic Conditions Worsen. GM explains that the Company relies to an extent upon sub-prime financing sources so that end-use customers can procure vehicles. Closer review of footnotes in the GM 10-K and of the 10-K for Ally Financial (an important financing source for GM vehicle customers and for GM dealers) is sobering. The period that prevailed since 1981 when nominal interest rates generally dropped and where financing approaches became ever more creative cannot last forever. Should nominal interest rates start to rise for customers in key end-use markets and should credit standards tighten, GM and other vehicle manufacturers with which it must compete could suddenly enter an even more challenging period than the one that emerged in 2008 and 2009.

The website for the U.S. Securities and Exchange Commission contains crucial warnings imploring the public to demand answers to tough questions regarding potential investments:

“… unlike the banking world, where deposits are guaranteed by the federal government, stocks, bonds and other securities can lose value. There are no guarantees. That’s why investing is not a spectator sport. By far the best way for investors to protect the money they put into the securities markets is to do research and ask questions. “

In 2013, I believe too many investors do not perform enough thorough analysis. What is worse, I think that too many issuers fail to make disclosures that would paint a realistic and appropriately cautionary view of securities that trade in public markets.

The common shares of General Motors seem to be a textbook case in point. To be “alive” in a strict financial sense, GM must be able to generate a substantial, growing stream of “free cash flow” and then distribute meaningful cash dividends to its common shareowners.

The biggest unanswered question with regard to GM seems simple: why would a sensible and prudent investor purchase common shares now when the largest and presumably best-informed holder is rushing for the door at a loss?

With apologies to Mark Twain, rumors that General Motors has now returned to a robust corporate life appear premature, threaten the foolish who fail to do careful homework before they invest and actually seem dangerous for the integrity of the securities markets themselves.

After all, if the U.S. Government is found to be a chief actor in “hyping” a flawed security it is simultaneously selling, how can other potential transgressions of our securities laws be fairly, rightfully and effectively prosecuted?

Read more Brass Tacks with Charles Ortel

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Charles Ortel

Charles Ortel became a lapsed member of the silent majority in August 2007 when he began alerting the public to dangers posed by structural changes in the global economy. Since then, Charles has appeared in the print, radio and television media with increasing frequency. Brass Tacks will attempt to offer non-partisan perspective on factors contributing to the unresolved, burgeoning crisis and discuss potential solutions. Graduated from Horace Mann School, Yale College and Harvard Business School, Charles tries to learn each day.  

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