Tuesday, July 05, 2005

GM sales precursor to a strong economy?

There has been many bull pundits touting 41% sales pop from GM last month as the indication that consumer is still strong and the turning point to GM's profits. First let's talk about the fundamentals of GM's business.

In a manufacturing environment, when your gross margins (i.e. sales less gross costs to make goods) are declining 1-2% every year while sales are increasing is nevertheless a dying business. Using sales as a pure metric to measure success is equivalent to tracking buy.com's sales (below costs at the peak of 2000) or tracking yahoo's eyeballs. Those were misinformed tactics as we have witnessed time after time since the internet bubbles burst. In addition, when you have the manufacturer actively financing their wares so that their customers could buy on a consistent basis is unsustainable. Think Nortel or the others during the telecom boom...remember vendor financing? Just watch GM's receivables which ballooned from $98b in 2000 to today $200b at the end of 2004. Top line sales growth is sustanainable until your customers blow up, then you'll get both sales implosion and "on going concern" implosion.

Many people also touted the cash cushion ($35billion) held in GM's coffer but the total liabilities of this company of $450 billion dwarfs anything the company has to offer. In share price terms, cash may appear to be almost $60/share versus GM stock price of $35 today, however, total liabilities is about $795 just to give you a perspective.

Do the math yourself and don't let the Wall Street pros or CNBC spin and obsfusicate the truth. As to whether GM's sales pop in June indicate the resilience of the consumer, you'll have to wait for another post. But the short answer is no.

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