General Motors Death Watch 114: Suboptimal

Is it any wonder GM announced another deadbeat deal and cash incentives the day after they reported their long-delayed fourth quarter and year end financial results? Whatever else you can say about GM, you can’t fault their news management skills. If the automaker had revealed the package before the accounts were released, the discounting would have [rightly] be seen as a sign of desperation. Coming hard on the heels of a fourth quarter profit and a reduced year-on-year financial loss, the sale seems part of a successful turnaround strategy. Only it isn’t.

March madness: zero percent financing for up to 36 months and reduced-rate financing for up to 72 months, plus $1k in “customer cash.” The “Spring Sales Event” (for Chevrolet and Saturn) and “Upgrade Event” (for Buick, Pontiac and GMC) excludes Hummer, Caddy and Saab. More importantly, it includes all GM’s GMT900 SUV’s and pickups. In other words, the marketplace has ruled that GM’s Hail Mary pass is unintentional grounding.

On the macro level, the financial experts are beginning to lose faith in GM’s game plan. "For the first time in a long time, I am questioning their strategy," BNP Paribas analyst Brad Rubin told The Detroit Free Press. "The results aren't that great considering everything. It still isn't enough."

True dat. GM has cut its costs to the bone. They’ve sliced an astonishing $6.8b from their expenses. They’ve also butchered their GMAC cash cow (for a paltry $5b initial payout) and sold off everything that isn’t nailed down, including their Arizona proving grounds. The company’s launched a slew of new products. And they’re still losing money in North America.

Forget smoke and mirrors accounting: “special charges” and “net profit.” Don't forget: (especially?) with its former CFO at the helm, General Motors filed its SEC paperwork si x weeks late AND restated its accounts all the way back to January 2002 AND admits that its internal controls on financial reporting are "currently ineffective.” So look at the cash flow.

Scanning backwards, GM’s burned through $3.8b in cash in 2006 and $8.2b in 2005. Scanning forwards, GM CFO Fritz Henderson said his employer would experience “negative cash flow” for the rest of 2007. Looking backwards, GM’s “first quarterly profit since 2004” masks the fact that the North American market didn’t even break even in the fourth quarter, and lost $779m for 2006. Looking forward, the company has, um, shot its wad.

Despite the arrival of the Tahoe, Yukon, Aura, Acadia, Outlook, Silverado and Sierra, GM NA’s fourth quarter revenues fell by $1.2b, while market share slipped to 23.2 percent. U.S. sales tumbled six percent through February ‘07. GM’s CFO says the company has “some impressive models coming,” but does anyone really think that the Astra (imported at a loss), Vue, Malibu, G8, restyled CTS and hybrid versions of the Yukon and Tahoe will be enough to turn around GM’s U.S. fortunes?

“GM’s automotive results are anemic at what we still believe is the peak of the company’s product, pricing and cost reduction cycle,” Banc of America Securities analyst Ronald Tadross told his clients.

So the light at the end of the tunnel is the headlight of an oncoming train. Although it’s increasingly clear we can’t depend on GM for an accurate picture of its cash reserves, even if we accept their $26b figure, that hoard is under mounting pressure. Take off $10b for float just to keep the doors open. Remove $6b – $7.5b for the Delphi payoff. Peel off another bil for the GMAC blowback. And then watch the burn.

The truth is GM has depended on asset sales to maintain its liquidity over the last year or so. That gambit is just about played out. GM can off-load the rest of GMAC, sell its Allison Transmissions unit, and, um, that’s about it. While GM’s overseas operations are the only bright spot in an otherwise bleak picture, the General’s foreign profits can’t save the domestic troops from an ignominious defeat.

Simply put, GM’s North American operations are not sustainable. According to the mavens over at Fitch ratings, “Despite profitability on a reported basis, GM's margin levels remain insufficient for long-term viability given the economic and product cycles inherent in the industry.”

If the United Auto Workers agree to a massive roll-back in their pension and health care benefits this summer, if gas prices slide to the point where GM’s high margin pickup trucks and SUV’s experience an enormous sales surge, if the competition takes a major hit (safety, reliability, something), GM could, conceivably, live long enough to turn itself around. That’s just about as likely as it sounds.

Meanwhile, GM is rolling out its latest national sales campaign, sealing its reputation as the K-Mart of cars. It could be US car buyers’ last chance to pickup a bargain– before all Hell breaks loose.