The trumpets sounded this morning as General Motors reported its 2014 fourth quarter earnings. GM’s bottom line earnings exceeded expectations (although revenue missed and was down from last year) and the pre-market share price of GM immediately jumped over a dollar a share. Despite the victory laps being taken by GM and its friends in the media, it would be wise for individual investors to think twice before jumping on the GM bandwagon.
GM management often exhibits a political DNA which was implanted at the company as a result of the 2009 auto bailouts when the Obama Administration manipulated a bankruptcy process to benefit UAW allies. GM’s main goal now seems to be to give the appearance of financial strength while ignoring the fact that the auto industry is highly cyclical as well as brutally competitive. The strategy has not worked to date considering that, since GM’s IPO in late 2010, share price has underperformed the broader S&P 500 average by approximately 70%.
So, for a contrarian view on GM’s latest earnings report, following are the items, in addition to the revenue miss, which should throw up a few caution signs to counter the hype. Let’s start with GM’s highly vaunted balance sheet which is constantly referred to as having an abundance of cash. GM ended 2014 with $28.2 billion of cash, cash equivalents and marketable securities. That is down almost a billion dollars since one year ago when it had about $29 billion. To put the number in further perspective, GM had $26.7 billion at the end of 2007. That was just one and a half years before the company filed for bankruptcy.
While GM and the media portray $28.2 billion as a huge cash stockpile that should be spent as quickly as possible, it is important to remember the high cyclicality of the auto sector and the need to maintain a healthy cash reserve to ride out inevitable industry downturns. Ford did just that in 2009 and that was the primary reason they did not follow GM and Chrysler through a taxpayer-funded bankruptcy process.
GM has made it clear that they feel safe in spending much of its cash reserve, a clear display of that government DNA. GM recently bragged about increasing capital spending by $9 billion in 2015 alone. It also wants to raise its dividend, a popular move on Wall Street, but not a prudent long-term strategy.
What else would the government do if it ran a major industrial corporation? Raise debt while increasing spending, of course! GM’s consolidated balance sheet shows that short and long term debt has risen by over $10 billion in just a year. Current debt is listed at $46.9 billion compared to $36.2 billion a year ago.
Another red flag I noticed that has not been getting much attention is the increasing UAW pension obligations at GM. Underfunded pension liability has jumped from $19.5 billion a year ago to the current 23.8 billion; an increase of $4.3 billion. The UAW overhangs remains with contract negotiations coming this summer.
One area that GM continues to have a different philosophy than the Obama Administration is the desire to have major corporations pay their fair share in taxes. Ironically, GM continues to skirt its tax liability as a result of changes to tax code which were implemented as a part of the 2009 bailout. President Obama gifted about a $30 billion tax credit to GM. In fact, GM has not paid its fair share in taxes for over five years now and the current tax credit on its balance sheet (as non-current asset) now stands at $25.4 billion. That credit has actually increased since last year’s $22.7 billion figure.
GM has seen its debt rise and cash position fall during the strongest phase of the auto industry sales cycle. Its focus on money-losing electric cars and increased spending should serve as a warning for the Mom and Pop investor who is tempted by the seemingly great news pronounced by pundits proclaiming how strong GM’s earnings numbers were. I do not believe that GM management is up to the task of succeeding when the inevitable industry downturn comes. We will likely eventually see history repeat itself as GM files for a second bankruptcy if it stays its present course of increasing spending while raising debt levels.
Mark Modica is an NLPC Associate Fellow.