Posted on 10/29/2014 12:22:41 PM PDT by jazusamo
It must be difficult for the Mom and Pop investor to make sense of General Motors' recent earnings announcement and subsequent drop in share price. On Thursday morning, GM reported earnings that were trumpeted as being "impressive" by one major financial TV network. In fact, early in the day, headlines at the network stated that the entire market was being driven higher by strong earnings at GM and Caterpillar. That hyperbole came into question when GM share price dropped about 3% on a day that the broader markets were strong.
It was unfortunate for many investors who bought into the early hype and drove share price up pre-market. As is often the case on Wall Street, the little guy was at a disadvantage to the big guys who are more astute at filtering through the hype to get a clearer picture of the financial condition of publicly-traded companies. And when the dust cleared, it turns out that things are not going as wonderfully at GM as the politically-trained leadership at the company would have you believe.
The prognostication that markets were being driven higher by GM was obviously nonsense. Even if GM did report impressive earnings, which they didn't, they are not even in the Dow Jones Industrial Average like Caterpillar is. And at a market cap of roughly $50 billion, they are hardly a major factor in the broader S&P 500. It is important to note that the company is, however, a major force when it comes to supplying ad revenue to the networks that put a positive spin to all things GM. So, let's look at the primary concerns at the company that are not widely reported on by most GM-friendly media sources.
In my opinion, the most significant indicator that GM is in poorer shape than top-line earnings figures imply is the continued cash flow problems at the company. Sure, you may have heard that GM has strong cash flow, but the financial statements prove otherwise. GM admitted that adjusted automotive free cash flow was a negative $800 million for last quarter . A look at GM's cash and debt figures gives an even grimmer outlook. Particularly considering that we are currently at an auto industry peak with strong overall sales.
GM started the third quarter with $29.8 billion of cash, cash equivalents and marketable securities. In three months that figure diminished by $2.2 billion to $27.6 billion. At the same time, short and long term debt continued ballooning from $40.1 billion to $41.1 billion. Those are some ugly stats and the main reason why any source that hypes GM as a financially stable investment should be questioned.
Adam Jonas at Morgan Stanley has been one analyst who has recently been portraying a less than rosy outlook for GM. Before we move on to Mr. Jonas' comments, I have to add that Morgan Stanley was one of the original lead underwriters for the GM IPO back in 2010. Back in late December of that year, they rated GM as an "overweight" with a price target of $50 . Shares were trading at $35 and change at the time when I wrote about the non-objective analysts' coverage here.
In the almost four years since then, share price has dropped over 10 percent while the broader markets rose close to 70 percent. That is just one more example of why investors should be wary of analysts' opinions. Now on to Mr. Jonas' recent comments which seem to be based on more realistic facts than his firms' earlier embarrassing calls on GM. From Benzinga.com:
Morgan Stanley's Adam Jonas said results for the recent period were "fine" with strong results in both North America and China. "But we're left with the feeling that something just isn't right."
Jonas called the next several years a "critical" period for the company to lay its long-term strategy, but said company's managers may suffer from complacency and lack of urgency implied by the task.
Shorter term, Jonas dismissed GM's 2015 guidance Friday as "aspirational benchmarking rather than real financial targets."
Given recent uncertainty about growth in Europe and volatility in China, "no auto company is in a position to confidently forecast any level of performance in 2015," Jonas said, maintaining an Under-Weight rating.
Indeed, "we're left with the feeling that something just isn't right" at GM. The company is failing to prosper at a time when the auto industry is thriving. Debt levels are rising as cash diminishes. Incentive spending rose during the latest quarter as the company saw global revenues decline from the previous year. All the while GM continues to offer the red herrings of huge China potential (something that has been touted for years which has never materialized) and plug-in electric cars (don't even get me going) as the future driver of profits.
GM's recall debacle is something that shouldn't be forgotten, as well. Keep in mind that GM will bear the brunt of the billions of dollars in recall costs during the fourth quarter of this year. The company had claimed about $3.4 billion in recall related costs during the first and second quarters , despite the fact that only a small percentage of the recalled vehicles had found their way into dealerships for repairs. I suspect that the company's cash position will not remain stable without the additional raising of capital.
The auto industry is both highly competitive and highly cyclical. GM does not seem poised for success and I expect them to continue to go deeper into debt as they will need reserves to weather any industry downturn. Do not be surprised if GM's next quarterly earnings report ends up being much worse than this past one. And if overall industry car sales slow as a result of any combination of economic weakness or more normalized lending standards, things will really get ugly for GM and its shareholders. We inevitably will even have to start rethinking just how "successful" the Obama auto bailout process was.
Mark Modica is an NLPC Associate Fellow.
How could Government Motors have any earnings when they have millions of cars and trucks being recalled?
You’d have to be nuts to go anywhere near GM stock.
That’s not helping the bottom line in the least and that’s going to continue.
One of my professors explained “The Rational Man Theory” of investing to me. Then he said to disregard it because nobody uses it.
GM will be around until the next recession. Then they will collapse again. And given the financial bubble the Fed has been blowing, it will be a hard one.
GM is basically dead to me, both as an investor and a consumer.
Unfortunately, as a taxpayer, I still have to bail out their sorry arse.
Well if Mark is correct, it’s a slam dunk to buy thousands of puts and we’ll all be as rich as Soros and Buffet.
They sold off-spun off Cadillac. I have no reason why. But it was an entire division—poof, gone.
The regime and GM screwed every bondholder, illegally, and handed the company over to union control, at least as far as I understand what happened.
So, given the perfidy that apparently fueled the GM is alive and bin Laden is dead continues.
I think it is like bying a “Rolex” watch from a guy on the street corner for 50 bucks.
Stupid is as stupid does my mama always said.
Cadillac is still part of GM.
Oldsmobile, Pontiac, Saturn, Hummer, Saab are gone.
I did not know that. Fox News and others claimed that the Cadillac dividion was leaving, and has in fact left GM. It was just a sound bite report with no additional information—oh, about a week or 10 days ago?
I think you misunderstood. The sales/marketing group of Cadillac is relocating from Motown to NYC.
Looking at their cash flow statement for the last 10 quarters they have been operating around 430 billion in cash (average is ($30.015 billion) so the $29 billion isn’t out of line and not near the lowest in that span ($27.0 billion in Jun 13).
The debt issuance is $9B issued and $7 billion repaid.
I usually look at free cash flow which for the quarter was ($1.9) B but the Dec 12 and mar 13 quarters were around the same. 1 quarter does not a trend make.
Here’s DB’s take:
The issue for the stock, however, is that the macro data points are not especially supportive
North American New and Used Vehicle pricing has begun to moderate a bit, even in segments with relatively high capacity utilization (such as pickup trucks). This concern was underscored by the fact that GM experienced a $200 MM yoy decline in contribution margins during the quarter (yoy chg. in price, mix, and content costs), which mitigates confidence in GM’s forecast of improved contribution margins next year. And while GM’s Q3 results remain quite strong in China, we are concerned that slowing Industry growth and macro headwinds may derail GM’s expectations.
Ultimately, upside for GM’s shares is contingent on the company’s shareholders becoming more convinced that free cash flow is sustainable, and being sent their way.
But even in the best case scenario, a free cash flow inflection may be 2 years away. Currently, cash flow is being masked by $1.7 bn of cash recall costs, $1.0 bn of cash restructuring, and $300+ million on litigation. Next year we expect an additional $800+ MM being spent on recalls, $400 MM+ on restructuring, $400-$600 MM likely to be directed at the Victim Fund, $1-$2 bn potentially being consumed by Justice Dept. fines, and $400+ MM potentially being consumed by litigation. If all goes well, GM’s free cash flow generative power ($5-$7 bn/yr) may come through in 2016. But that is quite far for an Auto Investor…especially considering the macroeconomic, regulatory, and technology risks that the Industry now faces.
Oh, well it was reported in error then. I had a discussion about it with my father. We both misunderstood I guess.
Obama administration gave a very large percentage of stock in Chrysler to the UAW in what eventually became Fiat Chrysler Automobiles.
Not GM. The value of Chrysler was underwater. The unfunded pension liabilities exceeded the market value of Chrysler even if stripped of its other liabilities in Bankruptcy court.
So Obama gave Fiat majority control of Chrysler and a few billion dollars.
Fiat purchased Chrysler stock from the UAW and merged the two companies. The UAW selling the Chrysler stock is supposed to fund Chrysler employee pensions. After the UAW mafiosi wet their beaks a little.
GM is in between bankruptcies for another whole host of reasons.
Maybe because they are killing their customers.
That is interesting—you follow these matters closely—I admit I do not.
Thank you.
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