GM’s Big Flop: How GM’s Failure to Recall is Predicted to Affect Their Future Stock

With a recall of over 2.6 million cars worldwide due to ignition switch danger, lawsuits and government investigations into General Motors’ conduct before the recall, investors are asking themselves if GM’s stock will continue to be a good value.

The answer is that it probably will be—but it depends on whether GM can produce quality vehicles.

What is the problem with the ignition switch?

The problem with the ignition switch isn’t that the switch itself stops working; when the switch fails, it also means that the air bags no longer have power and will not deploy in an accident. There have also been reports that it triggers engine stalls.

There is, however, some good news for GM though:

Public apologies go a long way.

GM’s CEO Mary Barra apologized at a congressional hearing to consumers, telling them she offered, “My sincere apologies to everyone who has been affected by this recall, especially to the families and friends of those who lost their lives or were injured. I am deeply sorry.” Current leaders at GM are working to fix the problem quickly and not only has the company issued a recall, it has hired former US Attorney Anton Valukas to conduct an independent investigation of General Motors. “He has free reign to go where the facts take him, regardless of the outcome,” Barra told Congress.

None of the vehicles in the recall are what make GM money—in fact, none of the cars being recalled are manufactured anymore. GM’s operating profit went up by $1.8 billion in the first quarter due to higher sales of its redesigned Chevrolet Silverado and GMC Sierra full-size trucks. Neither model is on the recall list. This will, fortunately for General Motors, minimize their profit and sales loss during this crisis period.

Fixing the problem means a one-time charge.

GM will take a hit on its earnings due to recall costs and replacing parts—but its underlying business is still solid. Without the recall expenses, the company had a solid quarter with global sales rising 2.3 percent.

Most analysts think the company stock price will be stable. “Everyone was braced for the worst and it did not happen,” Mirko Mikelic, senior portfolio manager with Clear Arc Capital which owns GM shares, told Reuters. Morgan Stanley analyst Adam Jonas was impressed with their financial performance thus far, but sounded a note of caution, “We’ll find out whether investors want to go along for the ride from here,” he said.

Informational Credit to 99 Truck Parts & Industrial Equipment Ltd.

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