Before diving into the debate again, I caution that investors should always ask their own questions, assess answers that emerge, reach their own reasoned conclusions, and act prudently. This column is simply a high-level review of publicly available information and very much a work in progress. Furthermore, I do not hold investment positions in GM securities of any kind, directly or indirectly.
Some wonder how I could question one centerpiece of the President’s successful 2012 campaign because this means the mainstream press, the U.S. government and the American electorate have managed to miss what seems to an independent analyst a glaring set of errors.
In my experience starting with General Electric in 2007, myopia is often an affliction shared by the media, research analysts at large financial institutions, rating agencies and regulators.
Considering GM under current market conditions, let us start with Accounting 101.
To “Recover” in A Commonly Accepted Financial Sense, A Company Like GM Must Produce a Gimmick-Free Operating Profit in its Core Business. If you look closely at GM’s 2012 Report on Form 10-K (page 38 of the filing), you will see that the Operating Profit (Loss) for the “Automotive” Segment was actually an Operating Loss of $ 31,106 million in 2012 as per the Company’s unadjusted figures. If you give management and the U.S. government a huge benefit of the doubt and remove the $ 27,145 million charge recorded for Impairment of Goodwill, you arrive at a Pro Forma Operating Loss of $ 3,961 million for 2012 that is the figure I cite in my previous column.
We can debate, endlessly, whether GM’s 2012 Pro Forma Operating Loss in the Automotive (Non-Financial) Businesses is truly representative of the ongoing earning power under the Company’s core “hood”.
My position begins with stubborn fact: GM already availed itself in 2009 of an unprecedented opportunity (likely never again to be repeated) to strip away draining plants, dealers, and other liabilities. Perhaps the short, 44-day period during which the Company shed its cocoon and emerged as a “butterfly” in July 2009 was too rushed and inherently flawed in some key respects from a classic “restructuring” perspective, which I suspect will be the final consensus when experts publish an incisive, dispassionate history. That said, how many times has a large manufacturing concern like GM also enjoyed the robust support it and its customers have had since then via massive fiscal stimulus, suppressed nominal interest rates and government mandated lenience in credit standards? By 2012, GM management and other proponents of the GM recovery “meme” had long ago run out of excuses for failing to deliver a cold, hard operating profit.
In addition, I direct your attention to an entry for Consolidated GM cited on page 78 of their 10-K report (link given above). There we see a $ 2,120 million charge for the cost of supporting defined benefit plans operated by GM in 2012 and chiefly relating to Automotive Operations. This charge is shown on an after-tax basis so the tax benefit (if any) used to produce the net after-tax charge should be added back to place the recorded amount on a comparable basis to the $ 3,961 million operating loss cited above. If you add the pretax equivalent charge back, you would likely come up with a larger operating loss than the $ 3,961 million figure I called out on Sunday.
To Actually Thrive, A Restructured Company Should Produce a Solid Profit After “Normal” Provisions for Corporate Income Taxes are Assessed. The re-organization via bankruptcy of GM’s American operation magically yielded a huge dowry in the form of “tax loss carry-forwards” that other entities have been denied after emergence from Bankruptcy Court. Going back to page 38 of the Company’s 10-K Report, we see that GM’s Automotive Business (excluding non-consolidated affiliates and investment gains) generated a Pretax Loss of $31,000 million (after Goodwill Impairment). This massive loss was more than offset by an even more gargantuan corporate income tax credit of $ 35,007 million. I invite accounting/tax professors and practitioners to weigh in concerning how much of this fortunate tax credit should be “matched” against 2012 pretax losses, and how much is, instead, an “extraordinary” benefit that artificially turns a net loss for 2012 alone into a stated net profit for the year that is certainly not “solid”.
Especially in Current Market Conditions, A Wise Investor in Common Shares will Demand a Reliable Cash Dividend and Ideally One that is Reasonably Expected to Grow. With benchmark “risk-free” interest rates close to historical low levels, many investors seek to own common shares that pay a higher and reliable cash dividend. These sensible investors seek businesses that are prudently financed, well-positioned from a strategic standpoint and on a solid, long-term growth track that has manifested itself in growing revenues, operating profits, net profits after corporate incomes taxes and “free cash flow” for many consecutive audited years.
We already noted a few concerns about GM’s reported financial results above and now add that GM’s common shares do not currently pay a dividend of any kind.
What’s more, binding provisions relating to GM’s Series A and Series B Preferred Shares make it difficult to imagine that the Company will soon be able to share whatever prosperity it ultimately does generate at corporate level with its patient, long-suffering common shareowners. In this regard, one notes that GM common shares currently trade well below the level set during the Company’s historic Initial Public Offering in November 2010.
On the one hand, failure to pay a common dividend limits the general interest within the wider public market in purchasing GM common shares as some large investors are only allowed to invest in companies that pay regular cash dividends.
On the other hand, shorting shares in a non-dividend paying company like GM can prove less expensive than shorting a dividend-paying comparable such as Ford Motor Company, assuming the cost of “borrowing” GM common stock remains reasonable.
In early December 2011, we noted privately:
“Traditional, “long-only” investors have been playing in the surf for too long, in our view. Busy chasing profits calculated in nominal terms, most investors have failed to discern their “real” after-tax wealth is being dissipated in a treacherous, unregulated global market that encourages devaluation of paper money.”
In nominal terms, some share prices have risen since then; however, we hold ourselves to a more rigorous performance standard. We care about the progress of wealth as tabulated after all taxes and fees and measured not in “fiat” currencies that are too easily manipulated by increasingly more desperate governments but in stores of enduring value, such as gold.
Human beings, in most cases, are reflexive optimists. Too many ignore obvious warning signs and instead embrace vague, happy words and sunny visions of hope even if such visions rest on rickety foundations.
Now days closer to the Ides of March that falls on March 28, 2013 translating the Julian calendar to the modern Gregorian one, we note these wise words from Francis Bacon and suggest that others also consider them carefully:
“It is the peculiar and perpetual error of human understanding to be more moved and excited by affirmatives than by negatives.”
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