General Motors Company (NYSE:GM) reported full year results earlier this month, and on the surface the numbers look less than stellar. While revenue increased by 1.3% net income fell from $7.59 billion in 2011 to $6.19 billion in 2012, a decline of 18%. Losses in Europe widened even as performance was strong in North America.
I wrote an article about GM before the release of the full year results, concluding that based on 2011 numbers the stock was undervalued. At first glance the 2012 results, while not great, don’t appear to change that thesis. But upon closer examination there are some big problems with the numbers. (Data from Morningstar and GM 10-K)
While revenue increased by the aforementioned 1.3% COGS increased by 7.8%. This had the effect of cutting gross profit nearly in half, from $19.1 billion in 2011 to $10.8 billion in 2012.
In 2012 General Motors Company (NYSE:GM) sold 9.288 million vehicles, up from 9.024 million in 2011, an increase of 2.9%. This leads to the conclusion that GM made far less profit per vehicle compared to 2011. This is not a good trend. Sacrificing margin for volume is very rarely a good idea.
Total operating expenses for 2012 total $41.2 billion, but this includes a large goodwill write-off of $27 billion. Excluding this charge OPEX sits at just about $14 billion. This leads to an EBIT of $-3.2 billion. So how did this loss of over $3 billion become a gain of $6 billion?
Deferred tax valuation allowance
GM claimed a reversal of deferred tax valuation allowances of $36.3 billion in the fourth quarter. What does that mean?
As the old GM was heading toward bankruptcy the company wrote off $39 billion of deferred tax assets. These had accumulated from all of the losses that had built up in prior years. But these assets only have value if the company reasonably expects to turn a profit in the future and therefore be able to claim these tax benefits. Since GM was in an unending death spiral, the assets were written off.
Now that GM expects to be profitable it has reversed that write-off and reinstated most of those assets. This increased the book value of the company above the market capitalization, requiring GM to write off the excess goodwill.
This leads to two conclusions:
1). GM will not be paying taxes in the US for quite some time.
2). Excluding the effects of the goodwill write-off and the tax benefit GM actually lost money in 2012.
The bottom line
It looks like GM actually had quite a rough 2012, with Europe taking a serious toll on the company. There are some big warning signs here, like the dramatic drop in gross profit, that are effectively hidden by the tax benefit and goodwill write-off. All of this makes GM’s financial performance extremely fuzzy. I don’t think I’ll be buying GM stock anytime soon.
A less fuzzy option
Ford Motor Company (NYSE:F) is the other major American car company. In 2011 Ford recognized an $11 billion tax benefit, goosing its net income to over $20 billion. I can’t tell you how many articles I read which claimed that Ford was trading at a P/E ratio of 2 because of this. Excluding this benefit net income was about $8.7 billion before taxes.
In 2012 net income fell to $5.6 billion after taxes. Ford pays far more interest on debt than GM, having refused bailout money during the financial crisis. In 2012 Ford payed $3.8 billion in interest compared to GM’s $489 million. This huge debt load was the main reason why I preferred GM over Ford in the past, but after GM’s strange results I may have to change my mind on that one.
The article Deceptive Earnings at This Car Company originally appeared on Fool.com and is written by Timothy Green.
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