General Motors (GM) stock had an IPO price around $33 a share. It currently sits around $25 per share and has risen roughly 32% from its all time low. But don't be fooled. This is not a company you want to invest in. There are seven reasons that lead me to this conclusion.
First of all, a measure of a strong growing company is always profitability. And not just profitability but profitability growth. GM fails in this regard. Its 2nd quarter profits are down 41% compared to 2011 and the profits from the 1st quarter of 2012 were down 62% compared to the previous year.
Second, if we take a look back at GM on a year over year basis comparing 2011 to 2010, we see that in 2011 GM revenue grew 10.83% for the year while gross income rose only 9.25%. Profitability is growing slower than revenue, indicating a loss of efficiency. The disparity between gross income and revenue was due to an increase in cost of goods sold.
In addition, GM's operations in Europe have been a constant source of disappointment. GM has lost a total of $14 billion in Europe over the past twelve years and in the first quarter of 2012 lost $256 million in Europe.
GM market share is also declining. Through July 2012 GM market share is at 18% down two percentage points from where it was at the same time last year. During the same time period Ford (F) lost 1.2 percentage points of market share, Chrysler LLC gained 1 percentage point and Toyota (TM) gained 1.7 percentage points.
A major news topic over the last few days has been GM's desire for the government to finally sell its remaining 26.5% stake in GM. The company is struggling to shake off its image as an insolvent organization using the government as a crutch. As of now, the government has flatly refused to consider selling at the current share price as they hope to at least diminish the $15 billion loss that this would entail.
A recent article in Reuters pointed out that GM has lost $49,000 for every Chevy Volt sold thus far. While the statistic might be accurate, GM contends that it is an unfair evaluation as the price of production will be spread out over the life of the car. This is a true statement, but glosses over the fact that the Volt has been an immense failure. Demand for the vehicle is low. GM went so far as to shut down production for five weeks this spring because they had a 150 day surplus of vehicles. The price is high. Even with various government incentives it still costs at around $40,000. The benefit of the car is practically nil as I will explain below. In fact, the Chevy Volt might be the stupidest car GM has ever made. Consider this:
Chevy Cruze- $17,000, gets 42 mpg
Chevy Volt- $40,000, 38 miles on the battery and then gets 35 mpg
If someone commutes to work and drives 42 miles in a day, it will cost her $4 in the Chevy Cruze and $0.46 (38 miles on battery, 4 miles on gas) in the Chevy Volt. The Volt saves her $3.54 per day. However, because the Volt costs $23,000 more to start with the breakeven point between these two cars is 17.8 years! But with a battery life of ten years and some anaylists estimating that the battery costs $10,000 to replace, you would never break even choosing a Volt over a Cruze.
This little comparison is not so much to emphasize that GM is losing money on the Volt but to demonstrate that this is a company with poor leadership that has invested billions of dollars into programs that are neither good for the customer nor profitable for the company.
As my last data point, take a look at GM compared to Ford on two key metrics. Rather than look at EPS or P/E, we will examine metrics more fundamental to the efficiency of a company, net margin and income per employee. GM's net margin is currently 6.12. Ford, GM's closest rival, has a net margin of 14.83, more than 100% higher.
Income per employee is a measure of the internal profitability of a company. Apple (AAPL) has income per employee of $0.41. Toyota has income per employee of $0.87. Ford has income per employee of $0.12. But scraping along at barely any income per employee is GM with $0.04 per employee.
All seven of these measures indicate to me that GM is poorly run, inefficient, and investing its resources in useless endeavors. I see this as a clear indication to avoid this stock.
Positives for GM
There are a few other factors to consider. First of all, this year GM has or will replace Karl-Friedrich Stracke (President of Europe), Joel Ewanick (Global Chief Marketing Officer), David Lyon (Head of Interior Design in North America), and Kevin Wale (President of General Motors China).
With auto sales rising across the board in August, GM saw August car sales rise a solid 10%. In addition, GM is keen to point out that it has now experienced ten consecutive quarters of profitability. While this is definitely positive, keep in mind that many companies go years if not decades with steady profitability.
General Motors has worked hard to bounce back from bankruptcy. They are turning a profit and certainly doing better than they were five years ago. That being said this company is still incredibly inefficient. Don't buy into this company until there is a significant change in direction. Be looking for a steady rise in profitability and income per employee. When those factors start to move, then it is time to buy. Until then avoid GM like the plague.