GM Profits Increase 74% – Should You Buy It Now?
Back in September I showed you 2 Reasons To Avoid General Motors Stock to protect your retirement portfolio.
Today, I want to give you an update on them and answer the question – After GM Profits Increase By 74% – Should You Buy It?
You can read that past article in full by using the link above…
But if you don’t want to; here’s a quick recap of what I said back in the Summer about it…
2 Reasons To Avoid GM Stock
- It’s Got A Lot Of Debt
As a percentage of its balance sheet, General Motors (GM) has a lot of debt….
In the most recent quarter, its balance sheet is made up of 83.2% of total liabilities. And its debt-to-equity ratio is 2.22.
I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term. This helps insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity… And usually this means I want to invest in stocks that have a debt-to-equity ratio below 1.
If you’ve seen some of our earlier articles, I’ve shown you stocks that have debt to equity ratios and liabilities as a percentage of their balance sheets that are far higher than GM’s.
Here are a few recent examples of those…
Yes, if you look at those articles the stocks all have much higher debt ratios than GM does… But a company doesn’t have to have horrific debt numbers to make me uncomfortable investing in something.
GM’s debt levels are too high for my liking… Even though they aren’t horrific at first glance… Key words being at first glance.
To illustrate GM’s major debt issues…
It has a total of $127.2 billion in short- and long-term debt and capital leases.
When considering its $37.5 billion in cash, cash equivalents, and short-term investments it’s got net debt of $89.7 billion.
And its market cap is $42.9 billion.
In other words, it’s got 209% time more net debt – debt after considering cash – than its entire market cap.
Meaning after subtracting net debt off its balance sheet that its equity is worth far less than $0.
How and why though is its debt-to-equity ratio not negative?
And why is its debt as a percentage of balance sheet not above 100% – which would show outright that its equity is worth less than $0 after subtracting debt?
Because it has a ton of assets on its balance sheet in the form of accounts receivable and equipment that offset its debt.
Accounts receivable are payments it expects to receive in the future from car loans its customers have taken out when they’ve bought cars from GM.
And the high value of the equipment on its balance sheet is of course its vehicles and other vehicle related equipment like parts.
In most cases these things are good on a balance sheet because they add to the company’s margin of safety.
In this case, they don’t do that.
Because auto loan delinquency rate is at its all time high in the United States because people are struggling to pay their bills during this pandemic.
This negatively affects GM and other car companies with far lower revenue, profits, and cash flows.
And people are buying far fewer cars overall – while dealerships are having to offer even larger discounts to get people to buy – during this pandemic as well.
Both things combined lower the revenue, profits, and cash flows which I’ll talk more about in the next section.
But they also lower the true value of the account’s receivables and equipment on the balance sheet… Or will at some point at least.
I would expect much of these assets on GM’s balance sheet to be substantially written down at some point.
This lower’s the value of these two assets on the balance sheet… Which lowers the value of GM’s balance sheet… Which will likely lead to GM’s debt to equity ratio going negative… Which will lead to its total liabilities as a percentage of its balance sheet to go over 100%… Which will mean its equity is worth less than $0 after subtracting its debt.
This is why you can’t just rely on metrics when investing in stocks… Because often the metrics don’t show you the full story of a company.
To learn more about why car companies like GM are in so much trouble due to auto loan delinquencies and lower sales prices on vehicles sold read the following articles…
GM is in extreme danger like Ford and Volkswagen above of bankruptcy due to these enormous debt issues…
Another reason it’s in major trouble is due to its profits and cash flow.
2. It’s Not Producing Enough Profits and Cash Flow
In the last 12 months GM produced minimal operating and net profits. And negative free cash flow.
These all due to increased costs related to the coronavirus and an extreme fall in people buying cars and paying their car loans they already have.
In the trailing twelve months (TTM) period its operating profit margin was 1%.
Its net income profitability margin in the period was 0.7%.
And its free cash flow to sales (FCF/Sales) margin in this same time was negative 10.3%.
EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.
Generally, you want these numbers to be as high as possible on the positive side because that means the company is generating profits and cash flow from its operations.
For example, I look for companies to have operating and net profit margins above 10% on a consistent basis.
And I look for stocks FCF/sales margins above 5% on a consistent basis.
Why these numbers?
Because after evaluating thousands of companies over the last 13+ years of my career I estimate fewer than 5% of all companies in the world produce consistent operating profit and net margins above 10% over long periods of time.
And far fewer than 5% of all companies consistently have higher FCF/sales margins than 5% on a consistent basis too.
When a company surpasses these thresholds, it means the company is a great operating business.
And these profits allow the company to continually reinvest in and grow its businesses in a healthy way.
GM’s low profits in these areas show its operating at an extremely poor level right now.
In time, this leads the company to have less money to reinvest in the business to continue competing well.
And this could cause GM to have to take on more debt just to survive… Which will put it closer to bankruptcy even faster.
With no end in sight to this pandemic GM is in major trouble due to its enormous debt and low and negative profits and cash flows.
I recommend you stay away from the entire auto industry during this pandemic… But especially avoid GM
This thesis to avoid GM’s continued to play out after it released its most up to date quarterly earnings on November 5th, 2020.
- Revenue was flat in the year-to-year quarterly period at $35.5 billion.
- While operating income rose 74% to $4 billion in the year-to-year quarterly period.
- And earnings per share rose 74% to $2.78 per share in the year-to-year quarterly period.
These are all fantastic… Especially considering how hard auto manufacturers got hit so far during this pandemic.
As one example of this, GM sales through the first 9 months of 2020 are down 17% to 4.7 million vehicles sold worldwide.
Its results improved so much due in large part to the lockdown’s mostly ending and people getting back to work.
Which allowed people to buy more vehicles while also catching up on their payments.
And saving $4 billion since 2018.
So, if this is all great why am I saying you should keep avoiding its stock?
Because it still has an enormous amount of debt.
When combining all short- and long-term debt and pension obligations it has nearly $116 billion in debt.
Against $23 billion in cash and cash equivalents.
This gives you a net debt position of $93 billion which is still 158% of its current $58.7 billion market cap.
The enormous debt makes the stock extremely risky… Especially now that much of Europe and The United States are locking down again.
For this reason, you should continue avoiding its stock even though its quarterly earnings were fantastic.
Plus, I’ve already found you some better potential stocks to invest in as well.
Click here to see some of the stocks we recommend to Depression Proof Your Portfolio.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.