Return of the Repressed: There's No Conspiracy in GM Building Too Many Trucks
There's been a lot of speculation over the past few days, fueled by a Bloomberg Businessweek story, that General Motors (GM) has been building too many pickup trucks. The facts have been extrapolated into a kind of conspiracy theory that GM is somehow colluding with the government to jack up earnings in the short term by booking 2012 numbers in 2011. It's past time to bring out Occam's Razor on this one.
Is it a pump and dump?
At The Truth About Cars, Bertel Schmitt nicely summarizes an analyst's research note that suggests GM is "channel stuffing," a practice it has often been accused of, in order to, you know, maybe get its share price up prior to the U.S. Treasury selling off its remaining equity position.
TTAC is no friend to GM, but Schmitt isn't exactly endorsing the channel-stuffing view, just laying it out. Of course, a more sensible explanation is simply that GM, anticipating a recovery in the pickup truck market, just built too many vehicles.
Where is that pickup truck recovery, by the way?
I've been expecting a pickup-led recovery for a while now. It has sort of materialized -- the Ford (F) F-150 and Chevy Silverado, unsurprisingly, topped the vehicle sales charts for June -- but the robust bounce-back to pre-financial-crisis levels is still waiting on... the housing market.
Unemployment, bad weather, and a glut of foreclosures has clonked any prospects of a real recovery in housing starts in 2011. I've talked to economists who figure this really won't improve for another few years, at which point people who want to form homes will be so starved for... homes to form that they'll drive a new-housing-construction boomlet.
Given that existing homeowners and the unemployed have been effectively abandoned by the federal government until at least November of 2012, the automakers are going to have to dial back their pickup truck expectations.
Basically, GM made a bet that didn't pay off. That doesn't mean it won't be able to sell through its larger-than-average inventory. It just means that it may have to recalibrate production for the second half of 2011.
A shift has begun
However, against this business challenge, GM can pit its newfound success with small cars. The Chevy Cruze, a compact sedan, actually outsold all other passenger cars in June, notching the number 3 spot overall.
It's pretty clear, given the way that GM is managing its product development and its GM Ventures-based investments in new auto technologies, that it's trying to unhook itself from the crack-pipe that is truck and SUV profits.
These profits are fat, but they're cyclical. GM -- and for that matter Ford and Chrysler -- don't want to lose these margins, but they would all like to smooth their product lineups to avoid a replay of the late 1990s and the 2000s, when they basically became truck-builders and left the car market to the Japanese and the Germans.
Why the hate?
What's worrisome here isn't GM's miscalculation, but rather the argument that there's nefariousness in its dealers' truck inventories, which are now running at 6 and half months for the Silverado alone.
The subtext is that GM is somehow deeply concerned about its share price ahead of the inevitable government exit. But I don't think GM cares -- in fact, I think it's trying to disconnect its fortunes from Wall Street and is concentrating on keeping its cars and trucks globally competitive.
In terms of fundamentals, the company is currently undervalued. It's making money, shedding debt, and picking up market share from Toyota (TM) and the latter struggles to recover from the Japan quake. If its institutional ownership (29 percent) paralleled Ford's (56 percent), its shares would undoubtedly be priced higher.
Chumming the water
So what you're really seeing here is sharks circling a bit of blood. But "channel stuffing" isn't much to base a negative investment thesis on. GM is going to sell a lot of pickups no matter what.
And eventually, Americans are going to demand as many as it can build.
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