General Motors (NYSE:GM) is under fire for making cars with faulty ignition switches. The faulty ignition switches, which can shut off the engine while driving and prevent the air bags from inflating, have been linked to a number of fatalities and accidents. This issue is causing much damage to GM’s reputation and finances. The company undertook an internal investigation of the issue and declared it to be a “fundamental failure of the company,” subsequently firing 15 employees. As GM CEO, Mary Barra, is being summoned to Washington to detail the results of the internal investigation, the company’s stock has fallen by about 20% this year.  Meanwhile, the company has been recalling cars in order to replace the faulty ignition keys. As of May 15, GM had recalled 12.8 million cars worldwide, of which 11.1 million were in the U.S..  The company has raised its estimate of expenses related to the recall from $300 million to $700 million in the second quarter, to cover the costs of recalling old Buicks, Chevrolets and Cadillacs.  This following expenses of $1.3 billion in the first quarter. A slight reprieve came in the form of a decision granted in favor of GM in more than 85 lawsuits filed on behalf of the owners who claimed that their cars had lost value as a result of the recalls. 
We have a $40 price estimate for General Motors, which is about 12% more than the current market price.
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Sales Unaffected By Recalls
Despite the problems, sales have been unaffected. Last week, GM reported that sales were up 13% from the same month last year. The number of volumes sold reached nearly 285,000 vehicles, making it the company’s best monthly performance since August 2008. The figure was comfortably above Ford’s 3% sales growth in the same period. Retail sales, which command higher margins, were up 10% while fleet sales were up 21%. As a result, the company is well on its way to increase its market share year-over-year. 
The U.S. auto market, which rebounded strongly in 2011 and 2012 following the recession, continued to grow in 2013. Vehicle sales reached 15.9 million units, implying a growth of nearly 8% year-on-year. Sales slowed in the March quarter of 2014, but the slowdown has been attributed to the harsh weather conditions prevailing during that period.  Sales have since rebounded and are expected to reach 16.1 million units, at the current seasonally adjusted rate. May represented the eight consecutive month of increased consumer spending on a year-on-year basis and the trend is expected to continue given the prevailing low interest rates and an improving economy. Moreover, despite the small car and midsize passenger car segments stalling, sales of large luxury, small SUVs and luxury SUVs are driving the overall market.  GM has capitalized on this growth with sales of luxury sedan Chevrolet Cruze up 41%, Cadillac sales up more than 30% and retail sales of Chevrolet and GMC large SUV’s doubling in May. 
The sales figures show that the negative publicity of recalls is having limited impact on the public’s perception of GM’s cars. There are principally two reasons for this:
- Many of the recalled models have already been discontinued. In fact, GM’s strongest performer in May, Chevrolet Cruze, replaced Cobalt, one such discontinued brand.
- Customers coming in for the recalls are being offered discounts on new cars and loans for up to 90 months. Given the low interest rates in the market, this is an extremely attractive offer.
The conditions also prove that local dealer interactions have been strong. If dealers can maintain the relationships with their communities, there is much potential in the recovering U.S. auto market for GM to exploit.Notes:
- GM CEO Mary Barra Will Return To Washington, Bloomberg, June 2014 [↩]
- General Motors Recalls Another 2.7 million vehicles, Washington Post, May 2014 [↩]
- GM Recalls More Cars Over Faulty Ignition Switch Issue, Wall Street Journal, June 2014 [↩]
- GM Economic-Loss Cases Bundled In New York Court, Bloomberg, June 2014 [↩]
- GM Reports Best Monthly Deliveries Since August 2008, GM [↩] [↩]
- Auto Sales And Weather, House Of Debt, April 2014 [↩]
- Auto Sales, Wall Street Journal [↩]