Beware of GM

The big news in the markets today is General Motors' IPO, which raised over $20 billion in what will go down as the biggest IPO (or, in this case, re-IPO) in market history. The stock priced at the high end of its expected range, and it has traded higher since trading began at the New York Stock Exchange this morning. Along with it, just about all stocks are higher across the board.

It's been a cause for celebration for the U.S. government, which was able to drop its stake in GM from 61% to about 33% (ultimate cost to taxpayers is, of course, TBD). But some investors aren't sold just yet, and with good reason. From The Washington Examiner,

Why hasn’t anyone asked the company or its federal minders why they have from all appearances artificially created over $1 billion in U.S.-based EBIT (earnings before interest and taxes) through October by overstuffing its dealers with excessive levels of inventory?

According to the Wall Street Journal’s cheerleading Andrew Bary, the IPO is generating a great deal of fanfare. The Associated Press’s Sharon Silke Carty is decidedly less enthusiastic (“the world’s most charming used car salesman couldn’t cover up major concerns”), identifying four good reasons to for investors to sit the IPO out. One of them is that “Years of fuzzy math (are) still not fixed.”

From here, it seems that the company has created a unique category of fuzzy math: shipped-ahead profit.

Essentially, per FASB standards, car manufacturers are allowed to book revenues "when a vehicle is released to the carrier responsible for transporting it to a dealer and when collectability is reasonably assured." In other words, once a car is shipped out to a dealer, it's a sale for GM, regardless of if they've been paid or not. This is common industry practice, and nothing out of the ordinary, but...

As of the end of October, GM dealers in the U.S. were sitting on inventories of almost three months' worth of sales, up from the low-60s only five months earlier.

The dealer inventory build-up has occurred despite at least two factors that would normally dictate lower inventory levels. First, after eliminating Saturn, Pontiac, and Hummer, GM is down to four brands (Chevy, GMAC, Buick, and Cadillac). Second, the company has substantially reduced its dealership roster. Yes, the company did offer to reinstate 661 dealers earlier this year. But while the rebound in the number of outlets could explain an increase in absolute inventory levels, it doesn't explain why vehicles are sitting on dealers' lots 23-24 days longer than they were in May.

Is 86 days of inventory an abnormally high level? In ordinary circumstances, I would say so.

In other words, beware of GM. The increased level of reported earnings might not be a huge factor in inflating GM's IPO price, but it is a factor, and it may be indicative of more window-dressing behind the scenes. As a result, any taxpayers who cheered the return on their GM investment this morning by investing in its stock might find themselves wishing they hadn't a few months down the line. Be careful out there...


[The Washington Examiner]