It appears that General Motors is trying to remedy one of the latest criticisms against them. That criticism is that the company has way too large a “cash hoard” and most recently came from former Obama Auto Task Force member turned shareholder activist, Harry Wilson. Well Harry, be at ease; GM has managed to reduce that so-called hoard by over $3 billion in just three months as first quarter earnings flopped on Wall Street.
An analysis of GM’s earnings data release shows that cash and cash equivalents plunged from $19 billion to $15.8 billion. Marketable securities’ value also fell from $9.2 billion to $8.4 billion. Unfortunately for GM optimists who might want to point to GM’s share buy-back as the reason for the cash burn, it turns out that GM only used $400 million in cash during the quarter to repurchase 10 million shares. Despite that buyback, the number of outstanding shares for GM rose from 1,612 million shares to 1,617 million shares having a net dilutive effect for shareholders.
The most troubling aspect of GM’s horrible first quarter results is that it is occurring during the peak of the auto industry cycle. GM continues to exhibit its government DNA since the Obama-orchestrated bankruptcy process which transpired almost six years ago as it spends billions of dollars more than it earns. How ugly is it going to get when the highly cyclical industry has an inevitable downturn?
Other notables from the earnings release include an overall drop in worldwide vehicle sale volume and market share. Volume fell from 2,416,000 to 2,399,000 during the quarter as market share dropped from 11.1% to 11% on a year over year comparison. Those figures would have looked worse if fleet sales hadn’t risen from a 24.6% share to 26.7%. Even more disappointing is the fact that automotive revenue fell from $36.3 billion to $34.4 billion in the period, perhaps reflecting the higher fleet mix.
The bottom line is that GM continues to struggle despite all of the help it gets from its friends in high places. The company benefits from a multi-billion dollar tax credit gifted to it from the Treasury Department following the 2009 bankruptcy. Bankruptcy Judge Robert Gerber recently exempted GM from liability on accidents which occurred prior to June of 2009 stemming from the ignition switch recall cover-up. NHTSA gives GM a free pass on vehicle defects like corroded brake lines which saves GM money but puts lives at risk.
GM has failed to realize the basic concept that leads to success in the highly competitive auto sector. That is to keep costs down while building the best quality vehicles which offer value to mainstream consumers. Instead, GM invests heavily and hypes politically-popular, money-losing vehicles that do not sell well like the Chevy Volt and Cadillac ELR. Billion dollar investments are made in risky markets like Russia and then later written off. Over a half a billion dollars was spent to put the Chevy logo on European soccer team shirts when the company does not even have a wide market for Chevy in Europe. The list goes on and on. Only a company that was supplied billions of taxpayer dollars would spend so wantonly.
There are many more headwinds to face GM such as liability issues and recall expenses. If the company continues to burn cash, expect credit rating downgrades to follow. GM Financial needs to continue to ramp up and raise debt levels to handle vehicle financing as the captive finance arm of GM. The industry remains as competitive as ever and any downturn would be devastating to GM based on what we are seeing in the company’s results during good times.
I believe that the government bailout of GM will eventually be proven to be far less than the success that President Obama portrayed as he espoused a platform of “GM is alive and Bin Laden is dead” during his reelection campaign. The fact is that GM has underperformed broader stock indices by a longshot since the bailout during one of the strongest auto industry cycles ever.
When the Obama Administration took control of GM, the primary concern was to protect the interests of politically-favored groups like the UAW. The manner in which the process transpired was such that bankruptcy experts and shady hedge fund types like Steven Rattner were put in charge while ignoring the obvious need to rely on auto industry experts on how best to fix GM and the sector for the long haul. Given the current course, there will come a time when boasting about electric cars and the gender of a CEO will not be enough to support GM’s share price and prevent a second trip through bankruptcy court.
Mark Modica is an NLPC Associate Fellow.