GM May Have Turned A Profit In 2010, But It's Still A Risky Play

Yay, GM posted 2010 net income of positive $4,668 billion! Detroit is back, baby!

Oh, what’s that? 28% of 2010 EBIT (earnings before interest and tax) came from just the 3rd quarter of the North America segment? 

And that number decreased 67% in the 4th quarter? 

GM Europe is hemorrhaging money, too? And those are the red flags I found just on the FIRST PAGE of their 8-page earnings release?!?!?!?


Dig deeper.  The truth is seldom as rosy as the headlines would have you believe.


Photo: Stone Street Advisors

11.3% growth in 2010q4 versus the same quarter in 2009 is good.  Well, a good start.  From the footnotes it looks like part of the increase in GMSA is from transitioning most of their South American operations out of GMIO (which gained Russia).  So, GM is doing good things in China, but while vehicle sales in GM Europe were up 12.6%, they still lost $568 million in just the last quarter from European operations.  On average, that means they’re losing $1,300/vehicle in Europe!  The “we’ll make it up on volume” joke comes to mind here…

Additionally, from the notes, emphasis mine:

(c) Vehicle sales data may include rounding differences.
(d) Certain fleet sales that are accounted for as operating leases are included in vehicle sales at the time of delivery to the daily rental car  companies.
(e) GMNA vehicle sales primarily represent sales to the ultimate customer. GME, GMIO and GMSA vehicle sales primarily represent estimated sales to the ultimate customer.

Any rounding differences,  accounting for operating leases as sales, and “estimates” on actual vehicle sales to the customer are no doubt made to paint as rosy of a financial picture as possible…


Photo: Stone Street Advisors

analysing market share #’s are far more complicated because I’d have to pull comparable period/presentation sales for all of GM’s competitors, not all of which trade in the US.  I find it interesting, to say the least, that GMIO and GMNA lost market share – their two largest segments – lost market share yet somehow across all segments, their global market share rose slightly, although I suppose this could easily be explained by “estimates,” “rounding errors,” and things of that sort previously mentioned.

The financial statements certainly look better than 2009, but:

1. It’s WAY too early to make any long or even intermediate-term forecasts based off 1 year of profitability and

2. There are still a bunch of orange flags:

  • inventory increased $2bn at the end of 2010q4 v. 2009q4, for about a 20% increase, and that’s just at the parent company level.  I wouldn’t be surprised if there’s a little channel stuffing going on here, with dealers sitting on more inventory as well.
  • Accounts receivable increased 15.7 in 2010, yet the allowance for bad debt only increased 0.8%.  If this trend continues it is a major cause for concern.  Increasing credit sales as a % of total without increasing allowance for bad debt suggests management maybe understating bad debt expense.
  • If you watch any amount of TV you’ve likely seen the crazy and often horrendously-produced local car dealer commercials hawking their wares with huge incentives.  A new lease on a cars similar to one that I leased in 2008 is now about 25-30% less/month with the same if not less down payment!  How the dealers and automakers are accounting for this is probably not as transparent as it should be (thank you FASB).
  • Accounts payable increased 14.8%.  Sure, when you’re increasing sales (and COGS) its not unreasonable to see accounts payable rise as well, if the trend continues, especially at a greater rate than COGS, then management is probably taking longer to pay suppliers, i.e. understating expenses and overstating net income.

It was clearly the best year for GM in years (and years), but anyone long the company is making a fairly risky bet.  There are still a lot of pension and other legacy issues and revenues are largely dependent upon credit availability and larger macroeconomic trends like unemployment and interest rates.

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