General Motors Company (GM, Financial) is experiencing a paradoxical situation. While on one hand the company is still struggling with the recall episode and the legal knot seemingly tightening around its neck, on the other hand the company is attracting a lot of positive vibes from the investor community. Let us study both the situations a bit more in detail.
Legal issues pertaining to bankruptcy and recall
GM has been facing flak from critics and legal corners due to its persistence to retain the bankruptcy cover. This strategy of GM is being seen by the critics as a means to dodge claims by customers seeking damage over recall due to a defective ignition switch. In 2014 GM recalled more than 2.6 million cars due to a defective ignition switch that cut power to the brakes, airbags and steering. GM is alleged to have known of the faulty ignition before sale of the vehicles. The recall resulted in a huge loss of value for the car owners prompting them to claim legal damages from GM in 165 lawsuits filed in different courts worth billions. On Feb. 17, 2015, Judge Robert Gerber heard the case in Manhattan’s Bankruptcy Court and hinted that he would review the extent of GM’s legal protection under the 2009 bankruptcy sale, if he finds GM in violation of constitutional right of its customers by knowingly withholding such a critical mechanical defect.
GM is trying to recover the lost ground by going the extra mile in providing a good customer experience. The company spent a lot of time and resources to overhaul its internal system to facilitate a hassle free online purchase for its customers.
The positive moves of the stock
Despite the legal shackles of bankruptcy and vehicle recall last year, GM is riding high on investor confidence. The stock has been making a lot of right noises in the investor circles, especially the big fish which are singing back to GM in a favorable tune. GM has been working hard to fortify its balance sheet to protect the company from bankruptcy. GM posted $1.1 billion in net profit for Q4 2014. The company racked in $25.2 billion in cash and current marketable securities by the end of 2014. GM has promised to increase its dividend 20% to 36 cents a share per quarter. Warren Buffett’s Berkshire Hathaway Inc. has increased the stake in GM from 1 million shares to 41 million shares in the Q4. And Soros Fund Management has increase its GM share holding from 728,938 shares to 4.9 million shares during the same quarter. But the claim for the biggest stake holder so far comes from Harry J. Wilson, a hedge-fund executive who would offer a $8 billion stock buyback in a bid to nominate himself for GM’s board.
Advantage GM
The renewed investor confidence in the stock has strong fundamentals to support it. GM is poised to shine in 2015. Multiple factors are playing to GM’s advantage. GM is well established and the no. 1 car manufacturer in U.S.; the U.S. economy is improving resulting in improved customer confidence and spending; unemployment numbers are on constant decline; oil prices have almost hit rock bottom and there is less chance of the rates heading in the northward direction; 2015 is forecast to be a robust year for U.S. car manufacturers; analysts have pledged high confidence in the stock with most upgrading their stock position to ‘Hold’ or ‘Buy’.
Competitors
The company competes fiercely with Ford Motors Company (F, Financial), Toyota Motor Corporation (TM, Financial), Honda Motor Company (HMC, Financial) and a few others in the domestic as well as international markets. GM needs to ensure that the position of a leader in the domestic market and a good Q4 2014 doesn’t bring in complacency within the system.
Key takeaway
GM is trying to offset the recall debacle and balance the odds in its favor. It is trying to achieve this objective by reaching out to its customers through enhanced purchase experience and simultaneously wooing the investors with good numbers. It is treading very carefully and ensuring a fundamentally strong balance sheet. The favorable market conditions are expected to further facilitate the company’s mission. The recent purchase volumes certainly present a very strong case for the company. For investors looking to build fresh position or for those who "Sold," the recommendation would be Buy or Hold.
