GM Stuffs Truck Inventory Channels to Goose Earnings
It looks like General Motors is up to its old tricks as it stuffs inventory channels with higher profit trucks. GM is able to record revenue when vehicles are shipped to dealerships as opposed to actually being sold to consumers, so the move will help to paint a false picture of positive second quarter earnings.
The Detroit Free Press reports that GM's truck inventory has swelled to a bloated 122 days worth of sales as opposed to an average of 60 to 70 for other vehicles. This compares to a 79 day inventory supply of similar trucks at Ford. Peter Nesvold, a Jefferies & Co. analyst, said it best when he stated what many of us have known for a while, "There's no credibility. It's unbelievable that after this huge taxpayer bailout and the bankruptcy, that we're right back to where we were." He went on to ask, "Is GM falling into old, bad habits?"
The US Treasury has stated that they will wait until after second quarter earnings are reported to sell the taxpayers' ownership stake in GM. Why is Treasury so sure that GM share price will only go up after earnings and is not at risk of falling further? The Obama Administration and Democrats have scoffed at past ideas of investing Social Security assets into equity markets because of the risks to capital. Now they seem to have no problem gambling with the taxpayers' stake in GM by market timing its exit. Perhaps the administration and GM are overconfident in the ability to drive share price by fudging earnings with such tricks as channel stuffing. As Obama continues to campaign on the perceived "success" at GM, the pressure is on to put a good face on second quarter earnings, credibility be damned.
First quarter earnings at GM also looked pretty good on the surface. The problem was that most of the profits were derived from non-operating income. Money managers and analysts saw past the surface and GM share price did not react well. It will be interesting to see what tricks GM might have up its sleeve when second quarter numbers are reported and more interesting to see how share price reacts. I'm guessing that the figures will once again look good on the surface, but be of questionable quality. It seems that trickery is the modus operandi at GM when it comes to financial reporting.
The higher profits that come from higher truck sales, or put more accurately, rising truck inventories, will goose GM's numbers on the surface. The underlying truth is that truck sales are down compared to lower profit cars. As an asides, it baffles me that GM CEO, Dan Akerson, has stated that he wants higher gas prices so that car sales will improve at the expense of higher profit trucks. Worse yet is the focus on the Chevy Volt, which loses money with every sale. It is absurd for the leader of a publicly traded company to campaign for actions that will negatively impact profitability. And campaigning is exactly what is happening at Government Motors.
Aggressive spending on incentives and plant investments should also have a negative impact on second quarter earnings. Remember that GM wants to be able to boast of strong sales and UAW job creation as part of the public opinion campaign effort, and this comes at a cost. There is also a cost to stuffing the truck inventory channel that has been overlooked. Typically, GM must pay dealerships to take the excess inventory since dealerships incur finance costs for the vehicles. Higher commodity costs may weigh on earnings as well. I don't know if GM will be able to mask these issues, but I believe they will try. At a time when GM should be focusing on the basics, it is again relying on smoke and mirrors to give the impression of financial strength. This short sighted strategy may play well on the campaign trail, but the inevitable result will be an eventual second trip to bankruptcy court if GM does not get its house in order. And, hopefully, taxpayers will not be footing the bill the next time around.
Mark Modica is an NLPC Associate Fellow.