GM: Turbocharged By Subprime Under The Hood

| About: General Motors (GM)

General Motors (NYSE:GM) reported earnings on Thursday, May 3, 2012 and so far the market has responded negatively. By the close of trading on May 4th GM is at $22.36, having fallen from just under $23 before the announcement. (Click charts to enlarge.)

Now, I was going through GM's footnotes of its financial statements, and one gem I picked up was the changing composition regarding the credit quality of its financial receivables. Part of my original skepticism of the company was this quote from 2010:

GM's top North American executive Mark Reuss, under pressure to quickly sell more cars and boost GM's value as it gets ready to sell stock to the public, said a shortage of subprime lending is holding back sales in the U.S.

Now, one has available just over a year of data concerning GM's movement into subprime auto lending. This information is in the company's financial statements in the footnotes, under "Finance Receivables, Net". One can use the SEC database link.

Here is a table of the amount of financing receivables (in millions) GM has on its balance sheet, sorted by FICO credit scores:

One can see the huge increase in the categories with very low credit quality. While the overall portfolio of finance receivables grew over 15.5%, the 540-599 category grew over 28%, and less than 540 category grew over 78.5% in just over one year!

At the same time there is a drop of almost 6% in the 600-659 credit score category, and to finish it off the over 660 category fell over 42%. (I have an idea about where the receivables have gone -- but that will be for another article).

Now, GM might claim that the credit risk of its portfolio is fine since 30 day + delinquencies and repossessions has fallen this last quarter. However, one sees a similar large drop in March of 2011 and a rise up for the rest of the year.

The question this brings up is, how much longer can GM grow accounts receivable to customers with credit scores under 540, at over 10% a quarter, (not annualised) in a U.S. economy growing at just over 4% (annualised) , in nominal terms, and not run into trouble? I estimate the probability is not high for it to turn out well (again).

I have previously expressed my negative opinion in several articles. GM: Avoiding Auto Giant... was written in November 2011, with the stock price at $22.31. Also in June of 2011, an update article, stock at $30.16, of the Caveat Emptor warning from May 2010 - before GM again sold stock to the public.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in GM over the next 72 hours.

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