GM: Problems Worse Than Recalled

There can be multiple reasons for huge automotive inventory builds, including (but not limited to) unattractive vehicles, non-competitive prices, stop-delivery notices from the manufacturer or simply economic recession that cuts overall demand. Whatever the cause, too much inventory bodes badly for future results. Dealers can't afford to keep too much metal on their lots. Big-ticket inventory means large floor-planning (financing) expenses. After the economic debacle of 2008-2009, you'd think that cyclical companies such as General Motors (GM) would be running lean and mean. Instead, it has been producing cars and trucks at absurdly high levels and then channel stuffing them from factories to dealer lots without balancing supply with customer demand. Bad publicity from the massive safety recalls has added to an already poor situation. As of March 31, 2014, GM's shipped but unsold vehicles were the highest on record. There are now more than twice as many GM products waiting for potential buyers than there were at year-end 2009. More Unsold Inventory on Dealers' Lots Than Ever Before Source: Zero Hedge View Chart » View in New Window » Every vehicle must eventually be sold. That will likely require some huge incentives to get them off the lots. Large discounts make for low profit margins or even losses. Wait too long to mark down vehicles and it will happen automatically when the 2015 model year turns new cars into less valuable year-old models. Excluding a $0.76 non-recurring loss, GM reported $3.14 in full-year 2013 EPS. That $5.26 billion net profit pales when compared to GM's unfunded pension obligation of almost 4x that amount. As noted above, GM management has taken the stance that the company will not voluntarily contribute anything to the pension plan in 2014. Barring another bankruptcy, that bill will become even larger after each year of non-payment. Bringing the plan onto solid financial footing could easily wipe out all reported earnings, turning analyst estimates of $3.71 for 2014 and $4.93 in 2015 into a cruel joke on the investing public. Auto companies are notoriously unpredictable. Value Line lists earnings predictability ratings for about 1,700 well-known firms. Its system ranks companies from a low of fifth percentile to a high of one-hundredth on this key metric. Daimler (DDAIF, Mercedes Benz) and Tata Motors (TTM, Jaguar and Range Rover) merited the lowest possible ranking. Ford Motor (F) comes in at Value Line's fifteenth percentile for predictability. All earnings projections for this group are guesstimates. Very profitable years have often morphed into losses over relatively short time frames. GM proved vulnerable to that pre-bankruptcy. The federal government wisely sold the last of its entire General Motors position even though it had to accept a net loss. Subprime auto lending has returned in a big way. Many auto loans now stretch out for six or more years, leaving many repossessed vehicles underwater. Sign-and-drive deals, often with no money down and 0% financing, are being widely used to move cars off the lots. That is not a sign of industry strength. The new GM is under legal attack with years of litigation ahead -- $750 million has already been earmarked for settlements. The absolute number of recalls is escalating. The final costs for repairs, loaner cars and reputational damage will almost certainly run much higher but are incalculable right now. Despite all the obvious bad news GM is being widely touted as a value stock. I see nothing good on the horizon even if America's economy manages to continue muddling along. If things slow, GM could be devastated. The generous dividend is not truly secure as profits could vanish quicker than Keyser Söze in The Usual Suspects. Take a cue from the government, which appears to have gotten this one right. If you own GM, sell it. If you don't, avoid it like the plague. You won't want to be a shareholder when the company needs its next bailout.

GM: Problems Worse Than Recalled

If the economy slows, GM could be devastated.

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