It has been around the net since yesterday that “trucks are piling up on auto lots” and that this could spell “trouble for GM.”
Bloomberg reports that GM did bet on a strong recovery and built more trucks to fill the imaginary demand. “The strategy is backfiring.”
The National Legal and Policy Center has more sinister suspicions. It states that “it looks like General Motors is up to its old tricks as it stuffs inventory channels with higher profit trucks.” The center is accusing GM and the Obama administration of “fudging earnings.”
All this was caused by a research note written by H. Peter Nesvold of Jefferies, a securities and investment group that just bought Prudential Bache.
Instead of regurgitating news pre-eaten by everybody from Bloomberg to Barrons, we wanted to wait until we get our hands on the original research note itself. The biass crowd is a rabid bunch, and we did not want to get caught copying mistakes.
You won’t be able to google the research note, but one of my high net worth friends is on Nesvold’s email list. My friend graciously forwarded the original report to me.
What worries Nesvold is this:
“GM’s pickup inventory continues to build (it now stands at 122 days vs Ford at about 80 days).”
Nesvold pretty much suggests that GM should stop making trucks for the year, as it has plenty standing around on dealer’s lots:
“We remain cautious about GM’s ability to continue producing GMT900 pickups given that inventory moved up marginally to 122 days. As described in more detail below, GM on the call unexpectedly announced that it would maintain pick-up truck inventories in the 100-110 day range through year end. While management offered reasons, we still struggle to understand the rationale. GM expects seasonality and a stronger second half to help bring inventories down, and reiterated its intent to clear the inventory by adjusting production if necessary.”
And why the huge inventories? They count as sold. Nesvold comes pretty close to calling stock manipulation:
“Perhaps the most significant takeaway is the different pickup-truck inventory strategies being pursued by GM and F. Ford F-series inventories are around 79 days, while GM’s Silverado and Sierra inventories are about 122 days. Exhibit 1 shows the cumulative difference between GMT 900 pickup production and sales, which should over time roughly match. There was a clear build in front of the IPO, and now again in front of 2Q.”
What is so important about 2Q? The US Treasury is on record that they would not lighten-up on GM stock before second quarter earnings are reported. The earnings have to be high to drive the stock price up. Nesvold seems to indicate that the stock is being pumped before dumped by the Department of the Treasury.
The exhibit 2 that accompanies the report has graphic content. Don’t view on an empty stomach if you hold GM stock.
“GM’s inventory is some 40 days higher than what Ford, which has a similar product mix, is carrying as shown in Exhibit 2. On the call GM said it was looking to exit the year at 100-110 days, which is 20-30 days more inventory than the 78 days it averaged at yearend between 2002 and 2010. Management said that it structurally needs to carry more inventories going forward because it had consolidated six plants to three. We can understand around the edges why that should result in higher inventories, plus the fact that the days’ inventory looks high due to cyclically low-end sales. But we respectfully aren’t convinced that triple-digit inventories should be the new normal. Just factoring in seasonally high sales and seasonally lower production in 2H vs. 1H, inventories should be down 15+ days. That GM intends to continue producing at elevated levels remains confusing. The net impact to the financials is that the company is pulling forward 2012 earnings into 2011. It respectfully begs the question, is GM falling into old bad habits?”
Nesvold has a BUY rating on Ford and a HOLD rating on GM. In the world of analysts, a HOLD is usually understood as “sell before everybody else does.” Such as the 900 lbs gorilla in Washington, DC.