Amid the Recalls, Can General Motors Persevere?

General Motors continues to be plagued with a recall crisis. Since January, the Detroit automaker has brought on 35 new investigators to tackle 30 recalls -- the costs are extreme.

Jun 13, 2014 at 11:56AM

General Motors (NYSE:GM) has had a rough start to 2014. The past five months have been one recall after another, and now the company is facing billions in recall costs. As the legal fees pile up, GM is struggling to regain its footing. Not only are the recalls causing financial headaches, but also damage to GM's brand and reputation. Investors are wondering if its time to cash in. Can the automaker climb out of this recall nightmare?

The total number of vehicles recalled by GM this year tallies roughly 16 million... so far. Numerous makes and models were taken off the streets for problems including faulty ignitions, seat belts, transmissions, and assembly. A recent recall occurred in mid-May, adding 2.42 million vehicles to GM's list of emerging safety issues; however, according to the National Highway Traffic Safety Administration (NHTSA), GM's recent roster is not among the biggest auto recalls ever.  

Then there are the legal proceedings. General Motors' CEO Mary Barra has spent the past several weeks battling atop Capitol Hill. Despite her efforts, General Motors was assessed a $35 million fine. The company will also pay civil penalties for delaying proceedings during the NHTSA's investigation involving its faulty ignition switches. 

But is there an upside for the burdened auto manufacturer?

What does this mean for GM?
General Motors is affected by its current situation in two ways: by the books and by market expectations.

The first-quarter filings tell a less than ideal story. Through April 24, GM's net income was a mere $300 million -- compare that to its 2013 net income of $1.2 billion in Q1 of 2013. Many of the recall costs are eating GM's profit. Two other downsides involve GM's return on equity, or ROE, and the earnings per share, or EPS. Again, both are well below their 2013 values. However, GM is not alone. Ford's (NYSE:F) ROE and EPS were also below last year's Q1 values. 

Ford's net income trailed its 2013 figure due to an increase in warranty reserves (from safety and product campaigns) and premium weather-related costs. Ford expects to reach a pre-tax profit of $7 billion-$8 billion in 2014.  

All of this boils down to one thing: less value for shareholders.  

The market is also voicing its concerns. Since the first recall on January 13, General Motors' share price has dropped about 15%. Also, two of its major players reduced their stakes -- Berkshire Hathaway and Greenlight Capital dumped a combined 27 million shares. Greenlight Capital released all of its 17 million shares shortly after GM's Q1 recalls.  

Investor confidence and brand reputation are dwindling in light of GM's recall nightmare. GM took longer than a decade to address the ignition switches, which are tied to at least 13 deaths (investigations are still under way). Appropriately, GM looks more and more like a careless, corporate giant. The question regarding GM used to be, "Which models have been recalled." Now, the question is better rephrased as, "Which models haven't been recalled."

GM must prepare for a long fight.  

Staying on the bright side 
Thankfully for General Motors, further legal damages are limited by its 2009 bankruptcy. Its Chapter 11 filing discharges a majority of its debt, including potential lawsuits, for all incidences before July 9, 2009.  As a result, GM is protected from paying most damages (injuries to persons and damages to vehicle and/or property) connected to its recalls, along with other civil suits. Even still, Barra has retained Kenneth Feinberg -- a specialist in mediation and alternative dispute resolution -- to evaluate settlement options for those families hurt in accidents by the company's recalled vehicles. As Barra stated, "Mr. Feinberg is highly qualified, and is very experienced in the handling of matters such as this." Smart move.  

And despite its seemingly poor performance, General Motors managed to increase its revenues from 2013 by $500 million while increasing its automotive adjusted free cash flow by $1.1 billion (comparing Q1 of 2013 to Q1 of 2014). This is largely due to growth in its European and international operations segments, which experienced moderate increases in their retail vehicle sales since last year. The higher adjusted free cash flow but lower net income is explained by a $4 billion increase to accounts payable. GM has more cash as it becomes slower at paying its bills.   

In the United States, GM controls 14.8% of the market for cars, an increase of 1% since 2013. Barra was pleased with the company's performance, saying that, "Our core operations was very strong this quarter, reflecting the positive response of customers to the new vehicles we are bringing to market." The 1% increase helped to raise North American sales by $1.4 billion this past year.  

GM's market share is also expanding in Asia-Pacific, Middle East, and Africa. Its Wuling, Buick, and GMC brands increased GM's volume of sales by approximately 9% in these regions last year. In China, Asia's largest market (by sales), GM is second to only Volkswagen which owns 20.8% of the passenger car market. Expanding international market share will aid GM in rebounding from its recall costs and to accommodate future growth. 

Final thoughts
There is no denying that General Motors is in a tough spot, but it appears it is in a position to turn things around. With protection from its 2009 bankruptcy, GM can mitigate losses from the recalls and take advantage of increases in market share, both in the U.S. and internationally. Furthermore, once recall costs no longer drag down profits, investors should see growth and a healthier balance sheet. Surprisingly, despite the recalls, GM is managing to keep its head above water. Investors should sit tight: This Detroit giant still has some fight left.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Kyle Richert has no position in any stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers