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GM Investors Should Look Past The Recall’s Impact

April 06, 2014 | About:

The mess that General Motors (NYSE:GM) is in right now is only getting worse with every passing day. What started with an announcement of 800,000 recalls for vehicles with faulty ignition switches now stands at 5 Million. Worse still, the company was aware of these faults and chose not to act upon it fearing recall costs and reputation loss. However Wall Street is supporting the Detroit Carmakers and the stock is being rated as a “Buy” from most experts.

Some Inexplicable Questions

Questions like why GM took 10 years to finally announce the recall of the vehicles in spite of knowing that the switches did not even meet GM’s own specifications have no rational answers. It is shocking to know, that GM experts had decided not to recall the vehicles saying that the cost of recalling the vehicles was too high. Documents provided by GM themselves show that these exceptionally high costs increase was all of 57 cents. While CEO Mary Barra was fielding these questions at the congressional hearing, she seemed equally clueless. Obviously, signs are looking ominous for GM. But don’t count GM out just yet as the management is finally doing a lot of right things and taking steps in the right direction.

The Secret Weapon Most Likely To Misfire

According to GM’s 2009 bankruptcy agreement, any accidents that occurred before 2009 protects GM from any liability arising out of it. In simple terms, since most of the accidents occurred before 2009, GM could save itself from litigations filed by victims’ families. However doing that will only aggravate the situation as it will be a public relations nightmare. It would be wise therefore, to accept its mistake and incur the cost it has to, and plan ahead of this disaster.

The Positives

The New CEO Mary Barra has brought about a positive change in the company. She has shown consistent willingness to co-operate in the investigations and has repeatedly assured that the Company won’t repeat the mistakes of the past.

The company, even during these tumultuous times, have stuck to maintaining its price discipline. In the past, GM had burnt its fingers by engaging in profit killing price wars that eroded its margins leading to the 2009 bankruptcy. GM’s margins in the first quarter have increased by 20% while for Ford (NYSE:F); margins have decreased by 18%.

With the European markets poised for a restructuring in 2015 and the company’s new focus on Profitability and transparency, the road ahead for GM may not be that bumpy after it manages to go past this Recall mess.

Automobile stocks tend to react to bad news quickly. Even during Toyota’s unintended acceleration case, share price downturn lasted for an eight-day period after recalls were made in January 2010. Even though stocks fell by about 14% during this period, the impact was gone inside the next 6 months.

Though in GM’s case, the impact will be more and the extent of financial damage cannot be estimated right away, once this fiasco is over, the company is well positioned to bounce back quickly. So investors need not panic!

About the author:

The author holds a Management Degree in Finance and provides deep insights primarily in the fields of Telecom,Automobile,Technology and retail

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