GM falls on accounting missteps
Banc of America sees rising risk of bankruptcy
By Shawn Langlois, MarketWatch
Last Update: 11:42 AM ET Nov. 10, 2005
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SAN FRANCISCO (MarketWatch) -- General Motors shares fell more than 6% Thursday after the world's largest automaker said it overstated 2001 profit by as much as $400 million.
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Also weighing on the beleaguered stock, Banc of America analyst Ron Tadross raised his two-year bankruptcy risk for GM to 40% from 30%, reiterated a sell rating and cut his price target to $16 from $18. See related item.
The restatement news late Wednesday capped another rough day for GM, which saw its shares touch on 13-year lows amid renewed fears of a strike at Delphi Corp.
The Detroit giant said it will restate results for 2001 to reflect an income overstatement of between $300 million and $400 million, or up 25% to 35%, and will also correct subsequent years as necessary.
GM added, however, the effect of the restatements in the years after 2001 is expected to be immaterial.
"The review to date indicates that GM erroneously recognized some supplier credits as income in the year in which they were received rather than in the future periods to which they were attributable," the company said in a Securities and Exchange Commission filing.
In other words, booking the suppliers' credit prematurely effectively boosted GM's bottom line.
Chris Ceraso, analyst at Credit Suisse First Boston, downplayed the financial impact in a note reiterating his outperform rating.
"Unless GM finds that similar errors were made in subsequent years, it sounds like the overstatement in 2001 would have been offset by understatements in subsequent years; thus, limiting the economic ramifications," he said.
Ceraso added, however, that he expects the SEC to look for evidence that GM knowingly manipulated the books in order to "meet a specific financial hurdle or Wall Street expectation."
The review is ongoing, according to the company, and no final conclusions have been reached.
GM said it expects to complete the review, which relates to pension obligations and business dealings with bankrupt Delphi, and take the appropriate action before filing its 2005 annual report.
The Securities and Exchange Commission issued subpoenas last month as part of the investigation. See earlier story.
Despite the 15% stock slump this week, Calyon Securities analyst Joseph Amaturo stood by his add rating and $40 price target.
"GM is on the brink of a product and financial turnaround," he said. " The company is diligently working to tackle labor issues, deliver enticing new products and reduce its cost structure."
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More problems for GM's Wagoner
By Shawn Langlois, MarketWatch
Last Update: 3:26 PM ET Nov. 10, 2005
SAN FRANCISCO (MarketWatch) -- In 2001, Rick Wagoner grabbed the wheel of a company drowning in fixed costs, facing an identity problem and losing a battle for U.S. market share against formidable Japanese competitors.
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Four years later, not much has changed and now the chief executive of the world's biggest automaker can add accounting woes to his long to-do list.
But the number-crunching foibles, which added up to $400 million to General Motors Corp.'s 2001 profit, differ from the other potholes in that they came under the watchful eyes of Wagoner, the company's former chief financial officer and a man who should know debits from credits.
The discrepancy, linked to mistimed booking of credits from suppliers, accounts for as much as a third of GM's $1.22 billion earnings in 2001, excluding special items. See full story.
Which begs the question: How does something like this slip through the cracks, particularly with a high-profile company seemingly so attuned to its tenuous financial position?
Credit Suisse First Boston analyst Chris Ceraso said that the actual financial impact is limited, but warned investors that it could lead to the Securities and Exchange Commission questioning whether the Detroit bean counters intentionally inflated profits to appease Wall Street.
"Considering that GM deals with credits from suppliers as part of its normal course of business, we are surprised that the company made this kind of timing error with respect to the recognition in revenue and/or cost of such credits," Ceraso said.
To be fair, Wagoner has not been accused of any wrongdoing by the SEC, nor has any other GM executive.
Still, when it comes to General Motors, nothing surprises longtime critic Peter Morici, professor at the Robert H. Smith School of Business at University of Maryland. He placed the blame squarely at the top.
"The revelations about GM's accounting are not all that damning," he said. "But GM's restatements are creating such a firestorm because GM is so uncompetitive and Wagoner is so vulnerable.
"When is the board going to wake up and recognize that Wagoner is leading the company down a trail of tears?" he asked. "Chapter 11 awaits, the just reward for management that is blind to facts and deaf to reason."
Banc of America Securities' Ron Tadross backed up Morici's take, raising his odds on GM filing for bankruptcy to 40% from 30% within the next two years.
Some industry observers, however, claim the significance of the overstatements has been greatly exaggerated.
"My guess is that this will all blow over. Wagoner shouldn't be blamed for what's basically nitpicking here," said Burnham Securities analyst David Healy.
"Actually, I'd say he deserves more credit over the past few years than the Street has given him."
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