At current trading prices, GM sports a price/trailing earnings ratio of 13.4 times and a price/book ratio of 175%. These levels are well below metrics for comparable manufacturers of durable goods based inside and outside of America. Therefore, at surface level, GM common shares appear inexpensive, even after soaring during the past 12 months.
Is this the correct way to think about the investment merits of holding GM common shares in your portfolio? Or, should we re-evaluate GM financial reports and also think more broadly about the wider macro-economic and geo-political context?
A Case for Caution Concerning GM Common SharesWhen financial analysis matters most, investors care deeply about the realistic growth trends in revenue, profit and "free cash flow." During nine months ended Sept. 30, 2013, total revenue for GM grew a skimpy 1.8% compared to 2012. It would seem that reported revenue growth struggled to keep pace with inflation. Alarm bells start to ring louder looking more closely at GM's gross and net cash flow margins. In 2013, GM pulled in $9.6 billion in cash flow on $114.9 billion in revenue, or 8.33 cents for each sales dollar. The prior year, GM earned $9.8 billion in cash flow on $112.9 billion in revenue or 8.70 cents for each sales dollar. Subtracting capital expenditures, GM earned $3.8 billion in net cash flow or 3.30 cents per sales dollar in 2013 compared to 3.36 cents per sales dollar in 2012. These thin cash flow margins are slim recompense for the mammoth tasks and risks involved in running a gigantic global enterprise during periods when quantitative easing and deficit spending certainly helped GM. Eyeing the Evidence
What evidence proves that GM successfully restructured its operations in ways that might ultimately benefit investors? According to the latest segment data, 60.9% of GM's revenue and 83.5% of GM's earnings before interest and taxes came from North America. Though management clearly knows more about geographical results, they choose not to reveal how GM performs inside the United States alone -- GMNA also includes Canada and Mexico. Furthermore, GM refuses to provide granular, reconciled information concerning the revenue, profits, cash flows and balance sheets of its operations in other important geographic markets with very different prospects and challenges. For example, revenue growth potential is limited in aging geographic markets like the United States and Europe where demographic realities, debt burdens, pressures on incomes and legacy risks abound. In contrast, management suggests that China and other rising nations offer GM meaningful potential. Until GM chooses to make more comprehensive geographical disclosures, investors will not be able to assign carefully considered values to components within the consolidated enterprise that likely merit widely varying valuation multiples. GM's Fortunes vs. Interest Rates
GM's fortunes could race in reverse when interest rates trend back toward historical norms. The single biggest support for GM's recent financial results is suppressed benchmark interest rates. GM, like other vehicle vendors, benefits from low rates many ways. The cost of financing vehicle production falls in a low-rate environment. Dealers are able to carry customer inventories at lower cost. End-use customers are able to stretch tight budgets and reach for vehicles marketed at higher price points. The indirect support arising from low interest rates that GM received from 2008 through 2012 was likely material and is not likely to persist much longer. Since 2007, the Federal Reserve System kept key interest rates near the historic floor. For example, during the 46-year period from 1962 through 2007, the average yield on U.S. Treasury Securities with a constant five-year maturity was 6.83%. From 2008 through 2012, the average rate on these securities was 1.84%, or 73% lower than the pre-crisis experience. What happens to GM financial results should the United States lose unchallenged control of its financial destiny and need to defend the dollar by raising benchmark interest rates? What Recourse Do Investors Have?
What recourse do investors have to recover against GM for potentially misleading financial disclosures? In 2012, vocal critics attacked capitalists who sold out during the historic, botched initial public offering of Facebook common shares. Many wondered then why it was wise for retail investors to buy at high prices when veteran financiers were rushing to sell. So far, few have taken time to examine the "rescue" and purported recovery of General Motors calmly and patiently, now that we can review what may have happened comprehensively with the benefit of hindsight. At headline level, taxpayers advanced tens of billions in rescue capital, management changed some important elements, the Federal Reserve kept interest rates low, and taxpayer-financed investments in GM Securities were sold to the investing public on numerous occasions. Along the way, did the investors who bought GM securities from government entities do so with benefit of full and fair financial disclosures? An empowered Securities & Exchange Commission and a Department of Justice that truly cares about the interests of all participants in the American capital markets would remove the makeup painted on financial disclosures concerning General Motors; they would force all concerned to reckon with hard truths. GM is, at best, a muddle. Assuming GM remains independent, the company will struggle ever harder to compete while facing rising structural headwinds that may blow gale force when the Federal Reserve System finally abandons out-sized intervention in global capital markets. Meanwhile, there is no realistic prospect of selling or merging GM in a transaction that might yield an acquisition premium for GM common shareholders. Pronouncements extolling "success" with General Motors since June 2009, when the company entered U.S. Bankruptcy Court, seem more like a masquerade than a fair description of underlying reality. At the time of publication, neither the author nor his firm held any positions in any of the stocks mentioned.
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