General Motors headquarters in Detroit. Photo: General Motors.

A recent Seeking Alpha article argued that General Motors' share price has gotten a boost from cheap, subprime car loans and surging auto sales -- trends that can't last forever. But surging auto sales may persist much longer than the bear expects. And a little more digging reveals that the article's argument regarding subprime car loans is also flawed.

Subprime crisis?
The bear article argues that General Motors' loan book has expanded to more than $11 billion, and that the company could lose billions of dollars if just a small percentage of these loans go bad.


The idea of automakers sending massive amounts of loans to subprime consumers can seem scary. After all, who wants another subprime crisis? But this is a very incomplete argument, and a few percent of $11 billion isn't "billions of dollars." The first questions that popped in my head:

  • How does $11 billion compare to other automakers' loan books?
  • What is 'a few percent'?
  • And how accurate is that prediction?

Judging by General Motors' cross-town rival Ford , a loan book of $11 billion doesn't seem to be much at all. Ford's consumer retail finance checks in at nearly $40 billion -- nearly four times the size of General Motors'. 

Relax! That doesn't mean you should hit the panic button and sell all your Ford shares. Quite the opposite, really.

Ford's credit division was able to take on massive loans at low interest rates, then dish that cash back out to retail consumers and make a decent profit. In fact, Ford's finance division made $1.7 billion in pre-tax profits last year -- the same amount lost by its operations in Europe, which represents a much graver headwind for the company.

Having a large loan book and finance division can be very profitable. General Motors' ballooning loan book doesn't automatically raise a red flag; if it's managed well, it can be a huge asset, as it is at Ford.

Now, it might prove worrisome if General Motors were financing a big portion of those loans to subprime consumers, as the bear author fears. But that isn't necessarily the case.

General Motors' leasing to subprime consumers -- those with credit scores of 620 or lower -- accounts for 8.6% of its total lending as of last quarter. That's slightly higher than the 6.4% industry average, but the difference is negligible for a company the size of General Motors.

More importantly, General Motors' percentage of subprime loans to overall loans is flat year over year, suggesting that the automaker has no interest in ballooning its amount of risky loans to juice its sales. 

Furthermore, merely chalking up "a few percent" and assuming that this proportion will turn into bad loans isn't a solid argument. Consider that while 8.6% of General Motors' loans are categorized as higher-risk, its annualized financial credit losses were only 1.4%, as of last quarter. If you do the math, that works out to roughly $154 million in losses -- nothing for General Motors investors to be fretting over.

Bottom line
General Motors isn't growing its loan book in a bad way; in fact, its financing arm has a long way to go if it wants to become as successful as Ford's. And General Motors isn't juicing its sales with excess subprime lending; it's flat year-over-year, and not much higher than the industry average. Anybody who spent 10 minutes mulling around General Motors' financial slides last quarter could have refuted the bear argument, in no more time than it took you to read this article. 

Should you be investing now?
With the American markets reaching new highs, investors and pundits alike are skeptical about future growth. They shouldn't be. Many global regions are still stuck in neutral, and their resurgence could result in windfall profits for select companies. A recent Motley Fool report, "3 Strong Buys for a Global Economic Recovery," outlines three companies that could take off when the global economy gains steam. Click here to read the full report!

The article Why This General Motors Bear Is Wrong originally appeared on Fool.com.

Fool contributor Daniel Miller owns shares of Ford and General Motors. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


Increase your money and finance knowledge from home

Investing in Real Estate

Learn the basics of investing in real estate.

View Course »

Goal Setting

Want to succeed? Then you need goals!

View Course »

Add a Comment

*0 / 3000 Character Maximum