This is the fourth in a series of commentaries that will take a look at five companies whose names begin with the word "General." We recognize some of them as household names and as global conglomerates with operations (just like our military) throughout the world. In earlier commentaries I reviewed General Electric, General Dynamics, and General Mills. This commentary is a review of General Motors (NYSE: GM ) . We'll take a look at General Communication last.
These corporate leaders have few similarities other than company names that start with the same word -- "General." The name is synonymous with leadership, and historically we have had both great and mediocre generals leading the fight. And so it is with these five companies.
Earnings quality is reflected in the financial statements
The Motley Fool offers two databases -- EQ Scan and EQ Score -- that are used to uncover cash flow and revenue recognition issues. As I explained earlier, smart financial officers can use several techniques to manipulate financial results, and manipulation of any of the three financial statements usually affects the other two. GAAP rules are complex and require the interpretation of experts (i.e., CPAs). But a critical eye on these statements can often uncover mistakes or trends that could be important for investors to understand before the battle has been lost.
When I review a company for earnings quality, I assign an index rank to the company from 1 (the lowest quality ranking) to 5 (the highest quality) and an associated numerical score. Just like in the military a company can earn a "5-Star" rank or a "1-Star" rank. Different companies with the same index rank can have different numerical scores. As the company's financial status changes over time, I adjust its rank and score. I look for trends that affect earning quality.
General Motors has been demoted -- no stars
General Motors, founded in 1908, is an American multinational automotive corporation headquartered in Detroit. It was the world's largest automaker by sales in 2011. In December 2008, General Motors and Chrysler got a $17.4 billion bailout from the $700 billion TARP fund. GM emerged from bankruptcy in 2009, with a huge IPO.
GM employs more than 200,000 people and does business in more than 150 countries. It sells brands that include Buick, Cadillac, Chevrolet, GMC, Opel, Vauxhall, and Holden, as well as two joint ventures in China. GM's OnStar subsidiary provides vehicle safety, security, and information services. GM competes with rivals Ford and Chrysler in the U.S. and with numerous well-known automakers around the world.
Data from GM's financial statements (as of Sept. 30, 2011):
|
Metric
|
2008 (in billions)
|
2009 (in billions)
|
2010 (in billions)
|
2011 (in billions)
|
| Revenue |
$148.9 |
$104.6 |
$135.6 |
$149.2 |
| COGS |
$142.1 |
$107.2 |
$118.3 |
$130.4 |
| Gross Margin |
$6.9 |
($2.6) |
$17.3 |
$18.2 |
| SG&A |
$14.5 |
$11.4 |
$11.4 |
$12.2 |
| Operating Income |
($13.6) |
($14.4) |
$5.8 |
$5.9 |
| Net Income |
($30.9) |
$104.8 |
$6.2 |
$9.9 |
Source: Yahoo! Finance; Capital IQ.
The data in the table above appear to be fairly innocuous. However, the balance sheet data are more telling:
|
Metric
|
2008 (in billions)
|
2009 (in billions)
|
2010 (in billions)
|
2011 (in billions)
|
| Cash |
$14.194 |
$22.813 |
$26.616 |
$31.977 |
| Accounts Receivable |
$7.918 |
$7.518 |
$8.699 |
$10.512 |
| Accounts Payable |
$22.259 |
$18.725 |
$21.497 |
$25.646 |
| Accrued Expenses |
$21.465 |
$13.607 |
$14.231 |
$24.482 |
| Pension Liabilities |
$55.723 |
$37.738 |
$32.762 |
$27.526 |
GM's Low-Quality Income
Cash on hand is fairly comfortable at nearly $32 billion, but
accounts receivable has been climbing. Accounts payable also is fairly steep at 70% of revenue, and quarter-over-quarter and year-over-year, percentages are rising. Accrued expenses of $24.5 billion in 2011 reveal that GM could be delaying payment of current expenses, and they have been moved from the
income statement to the
balance sheet.
|
Metric
|
Amount
|
2011 % Change (QOQ)
|
2011 % Change (YOY)
|
| Days in Inventory |
44 days |
15% |
17% |
| Inventory as a % of Revenue |
41% |
16% |
8% |
| Raw Materials |
$6.744 billion |
7% |
18% |
| Finished Goods |
$8.476 billion |
9% |
10% |
| Days Payable Outstanding |
74 days |
7% |
16% |
| Accounts Payable as a % of Revenue |
70% |
8% |
7% |
| Free Cash Flow |
($546 million) |
(182%) |
(104%) |
Source: S&P Capital IQ.
GM sells automotive products, and rising inventories spell trouble for an old general trying to pull its army out of the mud. GM is clearly stalling payments to suppliers, and its negative free cash flow indicates it is putting cash toward capital expenditures.
|
GM Per-Share Data
|
2010
|
2011
|
| EPS Normalized |
$3.028 |
$3.975 |
| Book Value per Share |
$17.19 |
$21.96 |
| Tangible BV per Share |
($11.91) |
($3.85) |
Source: S&P Capital IQ.
Will this war-torn general live to fight another day?
In 2009, GM -- mortally wounded -- received harsh medicine in the form of Chapter 11 reorganization. The doctor treated GM's symptoms and not its illness, however. Like many veterans, GM suffers from post-traumatic stress disorder. Having eliminated its Oldsmobile, Saab, Saturn, and Pontiac brands, among many other divisions, GM still seems committed to follow the same, tired path of a business model. As if shell-shocked, GM appears to be wandering aimlessly. With its stock price trading just above book value, this general has not yet grasped what everyone else seems to understand. We need a general that can lead our troops to victory.
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