December 7, 2010

Zero Hedge, Kaus Note GM ‘Channel Stuffing’ Ahead of and After IPO; Press Ignores

A few weeks ago, just before GM’s initial public offering went to the market (at the Washington Examiner; at BizzyBlog), I noted that Multi-Government/General Motors had spent the past several months shipping more cars than its dealers were selling, to the point where dealer stocks represented an unusually high number of days of dealers’ sales.

GM’s December 1 press release made that trend even more obvious, as month-end dealer inventory rose to 536,000 units, about 30% higher than May’s level.

As seen below, the trend was already pretty obvious in October, and a vigilant press should have been alert enough to notice it and attempt to gauge its financial impact:

GMdaysSalesAtDealers1110

Mickey Kaus at Newsweek linked to Zero Hedge, which picked up on the point last week. Kaus’s caustic comment:

General Motors’ cars are piling up on dealers’ lots again, the result of an apparent production surge designed to force sales during September and October in order to make the numbers look good for GM’s November IPO … sorry, I mean in order to maximize shareholder value!

That is indeed the important takeaway, which Zero Hedge, in erroneously claiming that dealer sales to consumers have been misstated, strangely missed.

Kaus is right when he asserts that overstuffing dealers with vehicles improves GM’s (but not dealers’) “numbers,” namely sales, gross profit and earnings before interest and taxes (EBIT), as I noted in mid-November:

… once a vehicle is on the truck and leaves the (GM) factory, it’s a sale (on GM’s books).

… You might be surprised at how much maximizing product shipped out the door — to heck with the long-term consequences — enhances reported profits. That’s because the variable costs associated with producing a vehicle are fairly low when compared to its selling price.

The only truly direct costs involved in vehicle production are materials, direct labor, and directly-consumed energy. Virtually everything else is at least in the short run essentially fixed, i.e., they are costs that will be incurred anyway regardless of the level of production. For example, you’re going to have a certain level of supervision no matter what; the costs of supervision don’t increase much, if at all, if production increases within a certain range. Pretty much the same number of workers will be involved with maintenance whether you’re producing 60 cars an hour or 80. Many fringe benefits, particularly health care costs, aren’t affected by production levels. You’re going to have to keep your factories’ lights on no matter how many cars they produce. Property taxes don’t change. Depreciation charges are fixed in the short run.

… in 2007, Forbes Magazine (reported that) “Strategy consultant AlixPartners estimates a manufacturer earns $8,000 to $14,000 variable profit on each pickup it sells, but zero to $6,000 on each car.”

Thanks to cost reductions achieved in its encounter with bankruptcy, GM’s variable profit is probably near the high end of both ranges; it wouldn’t surprise me if its variable profits are even higher. But to be conservative in the accounting sense, let’s assume that the variable profit numbers are $12,000 each for pickups (light trucks) and $5,000 for cars.

… (Considering that) GM’s domestic product mix is currently about 36% cars and 64% light trucks … about $663 million of … sent-ahead profit has occurred since May’s trough in dealers’ days sales in inventory … Serious talk of the company going public began at about that time. Coincidence?

Shipped-ahead EBIT during the last four reported months (August, September, October, and November) has amounted to a similarly estimated $1.06 billion, which is surely a very significant percentage of the company’s EBIT from its North American operations during that same period (since the analyzed months cross over quarters, it’s not directly estimable):

GMvariableProfitChange4mosTo1110

To be fair to GM, Ford’s days of sales in dealer inventory, based on data available in its quarterly 10-Q filings, has been as high as 85 days. But that was in June, ahead of plant shutdowns; GM made a big deal during the summer that many of its plants weren’t shutting down. The number of days of sales in dealer inventory at Ford as of September 30 was about 75.

Ford has one other thing going for it which would justify higher dealer inventories, namely a defensible expectation that sales will continue to boom. Ford’s U.S. year-to-date unit sales are up 21% through November, while GM’s are up only 7%.

Memo to Tom Krisher and Dee-Ann Durbin, who are supposed to be covering the car industry beat at the Associated Press, along with many other potential establishment media reporters: A government-controlled car company overstuffing dealer inventories for the apparent purpose of goosing reported sales and profits to make its books look good just before and after its IPO is what people in journalism used to call “a story.” Where have you been?

Oh, I’m sorry, I forgot:

APheartsGM081210

Cross-posted at NewsBusters.org.

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