Will the Department of Transportation's Maximum Fine Hurt General Motors Company?

General Motors Company was fined the maximum amount by the Department of Transportation. But does it really matter right now?

May 25, 2014 at 7:45PM

On May 16, it was announced that General Motors (NYSE:GM) would be fined the maximum amount by the Department of Transportation. The fine resulted from the automaker's failure to cooperate with the government and its investigation into how the company handled the fatal ignition switch recall -- or should we say, failed to handle. 

For a company that announced $2 billion in charges for the first quarter, and now another $400 million charge for the second quarter, a maximum fine is not what shareholders want to hear. 

But lo and behold, this maximum fine only amounts to... wait for it... $35 million. 

While $35 million is nothing to sneeze at, an automaker with a $53 billion market cap will surely have no issues paying it. 

What about those recalls?
Circling back to the $400 million second quarter charge we mentioned above, that number literally doubled in five days. 

On May 15, General Motors announced the recall of 2.7 million vehicles, topping 11.1 million in total recalls for 2014. In its press release, the company also announced that there have been 13 crashes, but thankfully, no fatalities. Accompanying the recall, is a $200 million second-quarter charge. 

This amount later doubled to $400 million just five days later, on May 20, when the company announced another 2.42 million vehicles for recall. 

I apologize for the barrage of recall numbers and fine amounts, but it's truly staggering that this is happening right now, in my opinion. As not to bog the article down any farther, here's a clean view of all the year-to-date fines and costs:

Gm Costs

Source: General Motors Financial Releases

The $400 million in second-quarter charges (so far) is a 20% increase to the first-quarter charges of roughly $2 billion.

The DOT's fine pales in comparison to the recent charges and costs
So you can see why the maximum fine of $35 million hardly matters in this instance. It's just too small and insignificant. 

Thankfully for General Motors, Senator Richard Blumenthal, did not have his way. Blumenthal is looking to have the maximum fine raised to $300 million, which would certainly have drew gasps from investors if a figure to that tune were levied against the automaker in the past week.

There are still expensive headwinds going forward
Right now, the company has a lot of things to work on, and soon, it may need to start focusing on not losing customers. Although the company posted an April sales gain of 6.9%, it wouldn't be surprising in the least to see customers hit the exits and start buying vehicles from its competitors. 

The other day, I detailed the 2.4 million vehicle recall from May 15, and noted why the stock may be in for more downside. The company still faces two potentially huge charges in relations to the ignition switch recall in the form of victims' compensation and a hefty fine from the Department of Justice. 

I covered each situation in more detail in the previous article linked above, but in the shell of a nut, I think the company could be facing charges near or above $2 billion.

No profits in 2014? 
If that were the case, coupled with the approximately $2.4 billion in charges the company has already taken, General Motors could risk losing its profits for the entire year. Consider that the automaker only made $4.9 billion and $3.8 billion in 2012 and 2013, and this profit-loss risk suddenly becomes a possibility. 

Should the automaker's charges and fines go in excess of $4 billion, I can't imagine the stock performing well. How could it? Sure it has a great dividend yield in excess of 3.5%, but by spending so much in fees and charges, why would investors stick around?

Instead, they could just consider Ford.

Warren Buffett just bought nearly 9 million shares of this company
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Bret Kenwell owns shares of Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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