Another Day, Another Recall: What Does It Mean for General Motors Company's Investors?

As America's largest automaker announces recall after recall, what should investors expect moving forward?

May 27, 2014 at 2:14PM

Gmrenaissancecenter
General Motors' Headquarters in Detroit. Source: General Motors.

Maybe General Motors' (NYSE:GM) strategy is to issue so many massive recalls that the public eventually becomes numb to the headlines? If that's the case, I think GM is doing a fine job. After initial recalls for ignition-switch defects linked to at least 13 deaths, the number of recalls this year ballooned to over 7 million. But that was just the beginning. Another round of recalls was announced last week, bringing the company to 30 individual recalls covering 13.8 million vehicles. Here are the details and what investors can expect going forward.

Another day, another recall
General Motors announced last week it will recall 2.42 million more vehicles in the U.S. in four separate safety recalls. That covers 1.3 million Buick Enclaves, Chevrolet Traverses, and GMC Acadias, along with roughly 1.1 million Chevrolet Malibus and Pontiac G6s. Worse yet, General Motors said it is aware of 18 crashes and one injury -- thankfully, no fatalities -- from the Malibus and G6s.

We're not even halfway through the calendar year and GM's recall woes are absolutely staggering. Those 13.8 million vehicles are approaching the roughly 16 million vehicles expected to be sold this year in the U.S. by all automakers combined.

Put another way, GM's 13.8 million recalled vehicles so far this year are more than seven times the 1.8 million vehicle recalls it averaged annually between 2009 and 2013. Ouch. Even worse, consider that the industry-wide record for recalls in a year was 2004, with 30.8 million vehicles -- GM is nearly on pace to make this a new record year for recalls, on its own.

It's easy to sit here and bash General Motors, but recalls are a part of the business. That's especially true for a company that sells nearly 10 million vehicles per year and is one of the largest global automakers. Even Toyota, a brand long known for excellent reliability, has issued two recalls this year that covered more than 8.4 million. Toyota's recalls (and those of other automakers) were vastly overshadowed by the deaths and possible cover-up linked to General Motors' situation.

As the recall woes continue for General Motors, investors are increasingly on edge. What should they expect next?

More recalls
I wondered in a previous article why General Motors opted to take a full $1.3 billion charge, to cover the cost of recalls in the first quarter, all at once rather than spreading it through 2014. The answer might be that GM expects to take more charges throughout the year stemming from additional recalls.

In addition to the $1.3 billion charge last quarter, investors can now expect an additional $400 million charge, double the amount GM announced earlier this month. GM also agreed to pay a maximum fine of $35 million handed down by the National Highway Traffic Safety Administration. That fine would pale in comparison to one from the U.S. Justice Department, which is investigating the GM over its handling of the car defect linked to the 13 deaths; consider that Toyota recently agreed to pay $1.2 billion for its massive recalls in 2010-2011.

In addition to the charges to pay for costs associated with the recalls and replacement parts, investors can expect a ballooning number of lawsuits. Since the recalls began earlier this year, GM has been hit with more than 70 lawsuits.

Another factor for investors to consider is the indirect damage done to GM's brands. A recent report from Millward Brown valued the top automotive brands and showed that GM's brands already trailed its competitors in terms of value. Chevrolet was valued at $4.9 billion and barely cracked the top 10; it was the only GM brand to make that cut. For a little additional perspective, crosstown rival Ford's brand value jumped 56% to $11.8 billion and pushed its way inside the top five most valuable automotive brands. While these values don't correlate with GM's value as a stock, they show the company's brand image is trailing competitors and will likely continue to do so after its massive recalls this year.

Investors should expect more recalls and for this entire process to be very expensive as the company attempts to make things right. While General Motors will remain a top-selling global automaker, potential investors will need to take a long-term perspective before buying in at today's price.

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Daniel Miller owns shares of Ford and General Motors. 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.

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