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FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Should GM Be Recalled From Your Stocks Portfolio?

Companies / US Auto's May 26, 2014 - 03:53 PM GMT

By: Investment_U


Tom Sandford writes: It seems General Motors (NYSE: GM) just can’t get a break these days.

Unfortunately, the only breaks that have come GM’s way lately have been in the cars themselves, as the reformed industry giant struggles to stay profitable in the midst of a public relations firestorm.

But doing so has proven nearly impossible in a staggering year full of recalls - in 2014 alone, GM recalled 13.6 million vehicles in the U.S. for 29 separate issues involving fire risk, transmission malfunctions, airbag problems and, most notably, an iteration of faulty ignition switches that reportedly led to the deaths of 13 or more people.

That last recall came with a hefty $35 million fine from the National Highway Traffic Safety Administration for GM’s pokey response to the dangers of the switches; reports claim GM knew of the problem as early as 2001, but only began recalls this February.

But that was the fault of the “old” GM, right? Whether true or not, these sins of the past are weighing heavily on the company in the present, both in the court of law and of public opinion.

Pumping the Brakes

Recall spending of $1.3 billion essentially wiped out profits last quarter, while this quarter’s costs are slated to top more than $400 million. What’s more, a Huffington Post and YouGov study revealed that four out of five Americans have heard of GM’s troubles, and believe the company’s reputation has suffered as a result.

With so many factors having a subtle effect on GM’s stock value, GM’s stock may remain a prisoner of pending litigation until the company releases the findings of a court-ordered study into how the faulty ignition switches played a part in auto accidents - which will be divulged in early July or late June.

The Silver Lining

Prior to the recall fiasco, all four of GM’s brands were up in sales. As of March 2013, Cadillac was up 20%, Buick jumped 15%, GMC rose 10% and Chevrolet gained 5%. But since GM announced the recall on 800,000 ignition switches on February 14, the company has been in crisis mode.

Although the government levied the highest possible fine of $35 million on GM for stalling in the ignition switch recall, the fine is equal to only about one day of GM’s revenue, meaning the company has the chance to come out fiscally on top, provided it can rally consumer and investor confidence once again.

Doing so shouldn’t prove impossible, as analysts note that GM’s sales have remained strong after three months of recall notices (sales rose 7% in April), pointing to a general indifference among consumers. According to CNNMoney, GM continues to enjoy the No. 1 spot in U.S. market share, too.

To better position itself for success, the company recently hired a dream team of crisis managers like Jeff Eller, who oversaw Firestone’s exploding tire fiasco and media outreach during the Clinton administration, while former attorney Anton Valukas - who assembled the bankruptcy report on the Lehman Brothers - will handle the investigation report.

If GM comes out on top, it’ll be a big win for CEO Mary Barra - the first woman to head a large automaker, who came onboard in January.

The State of GM’s Stock

GM’s stock has historically hovered far below that of leading carmakers Ford Motor Company (NYSE: F) and Toyota Motor Corporation (NYSE: TM), and has dropped by 20% this year.

The stock dropped by 3.5% on Tuesday in the wake of most recent recall announcements, but the true test of the company’s stock will play out once the report debuts. Until then, here’s what analysts are saying.

Why You Should Be Wary

Whispers of criminal negligence during Senate subcommittee meetings should send a shiver down the spine of current and potential investors, says Susan J. Aluise of InvestorPlace. Depending on the outcome, stocks could easily shoot up or down.

“Should any proof emerge that General Motors deliberately failed to disclose such a serious defect,” Aluise writes, “That would pose a huge problem for the automaker.”

The same can be said for investors. Barclay’s analyst Brian Johnson reveals that more recalls are in the works this summer - just another reason why GM’s stock won’t stay put until investigation findings are divulged.

Even if more recalls don’t come down the pipeline, Evan Avery of The Motley Fool predicts GM will experience slumping sales due to declining consumer confidence that may develop in the future. The recalls may have also paved the way for a loss of market share to other vehicle makers, he says.

Why You Should Take the Plunge

GM’s falling stock prices are an investor’s dream, especially for those who don’t mind holding stocks for five years or more, says Gene Marcial, a contrarian investor with Forbes.

In Marcial’s story, fellow contrarian and president of Croft Investment Kent Croft says the stock shakeup “is a great opportunity for long-term investors like us who hold stocks for at least five years.”

Croft says GM’s decision to cooperate with the government and abundant recent efforts in rectifying recalls could position it to be one of the top comeback stock stories of the decade. Thus, it makes sense to pick up a few shares while the chips are down.

“We see GM shares outperforming the market over the next five years, and this is a perfect buying opportunity for long-term value investors to buy into a potentially huge winner among car makers,” Croft says.

Hedge fund manager Kyle Bass says the fiasco is a great opportunity to pick up some shares for when the company emerges from the recall doldrums in six or so months.

“The investment case is unbelievable with GM,” Bass said. “The company has $30 billion in cash on balance sheet... The company is trading at two times EBITDA (earnings) and has 3.7% dividend yield.”

The outlook looks both bleak and promising, but until the litigation report hits desks in June or July, it looks like GM and potential investors may have to park it.


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