Just days after announcing a $1.8 billion share buyback program to offset the dilutive effects of convertible debt and employee compensation, Ford (NYSE: F ) hit investors in the auto space with sensitive news: a recall.
The automaker is recalling nearly 700,000 vehicles "to fix two safety problems," according to the Detroit Free Press.
Specifically, the company is recalling 2013 and 2014 models of the Escape and C-Max models. The largest issue, involving 692,000 vehicles, is for a software malfunction in both models that can prevent the deployment of side curtain airbags during a rollover. The second issue involves a faulty door handle on the Escape model.
Airbags. Safety issue. Recall. Sound familiar?
Is this like the General Motors recall issue?
As you may recall -- no pun intended -- this sounds awfully similar to the initial close to 619,000 vehicles that General Motors (NYSE: GM ) recalled in February due to the fatal ignition switch issue.
The situation has ballooned into a massive problem for GM involving 2.6 million vehicles, while total recall costs soared to $1.3 billion in the first quarter.
So should Ford investors worry about this large recall turning to a massive black hole like it did for General Motors? In short, no.
Why Ford's recall is different
For starters, the company has stated that there have been no crashes or injuries reported due to either issue. So that's a big plus.
Although 700,000 vehicles is nothing to sneeze at, its baggage does not include the negative press, possible victim compensation, and billion dollar repair costs.
This recall actually isn't that surprising, given that the company disclosed in its first-quarter results that it deposited $400 million into its warranty reserves. The earnings results were issued roughly two weeks ago, on April 25.
Hopefully Ford had some insight here, estimating that this amount will cover the current recall so shareholders won't be in for any unexpected financial surprises. I would think that the $400 million will be more than enough. Allow me to explain.
What's the damage?
According to the National Highway Traffic Safety Administration, in order to fix the software issue that effects the deployment of side curtain airbags, dealers will simply have to reprogram the restraint control module, which is responsible for controlling the airbag. This should not be a large burden, financially, since no new parts will be required.
In regards to the Escape-only issue of the door handle, dealers will need to inspect each vehicle and adjust the handle accordingly. From my interpretation, they will only need to alter the existing handle, not replace it. This too should save money for the company.
Both recalls are scheduled to begin on May 26.
To me, it doesn't seem like Ford will need to spend $400 million to correct this issue. Make no mistake, it's never good for investors to wake up to a headline involving a recall. Especially to the tune of almost 700,000 vehicles.
But with low fixing costs, no accidents or injuries, and by addressing the issues early enough, Ford and its investors shouldn't have too much to worry about regarding this recall.
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