Investors shouldn’t get too sweet on dolled-up GM

November 10, 2010

The impressive third-quarter showing from General Motors shouldn’t wow prospective investors too much. Sure, the automaker’s $2 billion profit beat Ford’s. It even eked out a slightly better pre-tax margin than its rival. But GM’s last set of earnings before next week’s initial public offering aren’t as flattering as they look.

The company stuffed its dealers with 10 percent more inventory than it did at the end of June. There’s nothing inherently wrong with that. Car sellers have kept fewer vehicles on lots over the past couple of years. Demand was lacking, as was financing. But in GM’s case, many dealers also held stocks down in case the Motown manufacturer cut them loose in its restructuring. Rebuilding those levels now makes sense as the 2011 season approaches and sales pick up.

GM also sharply curtailed less profitable fleet business from 34 percent of sales to 26 percent, the low end of the range GM expects for the year. And it churned out more trucks than in recent periods. At 27 percent, full-size pick-ups accounted for a fifth more of U.S. production than in the second quarter. That’s fine if buyers are there: margins are higher on these and SUVs. It helped GM rake in more cash in the United States in the three months to September even though vehicle sales actually fell almost 8 percent.

It all paints a pretty picture. But it’s unlikely that notably less profitable compact cars will remain a paltry 1.2 percent of U.S. production, as they were in the third quarter — some 80 percent lower than in the second quarter. When the trend reverts, margins will drop.

It’s perfectly natural to get all dolled up ahead of a big event. Companies facing hostile takeovers often experience a sudden burst of revenue as they push out more product to showcase their value. Cadbury and Potash are two recent examples. The myriad banks advising the U.S. Treasury and GM on the IPO know the drill all too well. JPMorgan, for one, made excellent use of it in the one quarter it managed to hit its 20 percent return on equity target back in 2000 by selling to Chase.

GM’s third-quarter results might not be quite so contrived. And the company is certainly in healthier shape than it has been for years. But such make-up cannot be applied every quarter.


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Of course GM worked on the numbers to make the IPO look attractive. Let the buyer beware.

Posted by birder | Report as abusive

Hit the nail right on the head. Any other company phonying up their numbers like this would be tarred and feathered. i doubt too many will be taken in by the smoke they are blowing. but the IPO will APPEAR a great success even if the Govt has to buy the stock themselves.(us taxpayors are running out of pockets for their games). The next quarter will show just much they robbed peter to pay paul–it won’t be pretty.

Posted by dominickspez | Report as abusive

What the hell are you talking about dominid ? are you joking?

Posted by SwissMaestro | Report as abusive