GM's Credit Policy: Trick, Not Treat

| About: General Motors (GM)

General Motors (NYSE:GM) reported Q3 earnings on Halloween, October 31. This was greeted as a treat by the market as the stock rallied over 9.5% on the day from $23.28 to $25.50.

Readers should be aware of my previous negative stance on the company in articles such as GM: Caveat Emptor, GM: Caveat Emptor Update, and GM: Turbocharged By Subprime Under The Hood.

Indeed, GM is still being tuned up by extending subprime credit as found in the footnotes of its 10-Q filing. Accounts receivable with credit scores under 599 increased by $501 million, or 6.9%, in the Q3. This compares to a drop in sales of $38 million which is -0.1%.

One can add together the automotive and financial receivables and find that they grew over 12.4% in the quarter. Restricted Cash, as measured by Cash & Equivalents + Marketable Securities, rose by only $37 million. Described in the footnotes one can find a report that GM securitized $1.372 billion in receivables. To clarify this means GM sold accounts receivables and received cash for them. This probably explains in part the large drop in receivables with a credit score of 660 or greater. However, the more "toxic" receivables cannot find a buyer, and are left sitting on GM's balance sheet.

Some people might object that these receivables are just North America (GMNA) and that GM is a "Global" company. Okay, let's proceed along this line of thought. One can also look at the various segments reporting in the footnotes. GM did increase sales in North America by 1.9% in the 3rd Quarter, from $22.9 billion to $23.344 billion. However, the growth in subprime receivables is still over three times this amount. Further, year over year, GMNA sales grew 6.7% while receivables with credit scores under 599 grew 30.8%.

The situation is even worse if one looks at the worst of the lot, which is credit scores < 540; they grew over 9.2% in the quarter and 48.9% from the previous year. Indeed, since December of 2010 receivables with credit scores under 540 have increased 116.4%, at a 55.5% annual rate, for a total of $1.546 billion.

Once GM runs out of subprime customers, sales will have to slow in America; we will just leave out Europe right now to be more polite. A foreshadowing of the results from extending this type of credit can be seen in those below:

Look for the trick to be on GM for having learned nothing from the Lehman, Freddie, or Fannie about extending credit aggressively to subprime customers.

Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in GM over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.