Why General Motors Should Scare Investors and Regulators
NEW YORK ( TheStreet) -- After last night's fright night, investors looking for a real-life scare should take a closer look at the financial disclosures of General Motors
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 Shares
When 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.