Largest GM loss ever?

February 12th, 2008 · No Comments · Subscribe to this feed

At first glance, the future looks dim for General Moters (NYSE: GM). But on second glance, a $38 Billion loss isn’t all that bad. The fact that GM was down less than 2% on the loss is the first clue something is amok. Think about it: how could a company with a $15.055 Billion market cap lose $38 Billion and only dip 2%? Short answer: it couldn’t. As it turns out, the $38 Billion “loss” is almost entirely an accounting fiction having to do with the way GM handles deferred tax credits. What is a deferred tax credit? Basically, it’s when a company chooses to recognize as an expense (that is, write-off) something that can’t be written off in the current year but that can be written off against profits in a future tax year. GM’s auditors, having decided that deferred tax credits may not be recognizable against future profits due to its current financial position, declared that the accumulated deferred tax credits must be accounted for. Since deferred taxes are listed on the balance sheet as an asset, this means they must be written down against current results.

In my personal opinion, this reeks of a big bath maneuver by mangement. Following this line of thought, it makes sense that management would want to write off everything in sight since investors are already expecting the worst. This sets up future earnings to impress since everything that can possibly go wrong (and then some) has already been written off. Management will then, with great fanfare, take credit for the miraculous turn-around and, imagine that, earn a bonus on the same revenue twice. If that weren’t enough, Money.com reports that the UAW deal negotiated last year promises to save GM between $4 billion to $5 billion per year in labor costs, with the new buyout offers for 74,000 or so union workers only adding to those savings.

Put it all together, and what do you get? Well, I can’t quite say I recommend GM as a buy. General Motors still faces more than its share of risk and uncertainty. For instance, a signficant recovery in the dollar versus emerging currencies could severely cripple global sales. Only time will tell. In any event, I will keep my eye on GM. I don’t think it’s a buy now, but if it dropped below $15 I would consider buying and at $10 I would almost definitely pull the trigger. Is anybody else buying GM at current prices? Why or why not?

Like what you see here? Subscribe to my feed for more great content every day!