Seeking Alpha
Long only, value, special situations
Profile| Send Message|
( followers)  

Summary

  • GM refuted analyst speculations that sales might take a significant hit by reporting positive figures in its recent monthly sales report.
  • The faulty ignition switches that unexpectedly cut off engines during operation rendering airbags, power steering, and power brakes are linked to 13 deaths and 32 accidents.
  • So far, the company has set aside roughly $750 million this quarter related to repair and rental costs of the recalled cars.
  • GM is presently involved in a process to improve quality of its products and narrow down its focus on a specific number of engines.

General Motors Co. (NYSE:GM) has encountered troubles time and time again but somehow the company has always managed to fight through and emerge victorious. The faulty ignition issue the company is currently facing has pushed the company into an abyss yet again with fiery accusations of "a culture of cover-up". As a result, the stock price of the company dropped by more than 15% this year following the litigation issues.

So far, 13 deaths and 32 accidents have been linked to the faulty ignition switches that unexpectedly cut off engines during operation rendering airbags, power steering, and power brakes inoperable. Delphi Automotive PLC (NYSE:DLPH) surfaced following investigations holding the company partially liable since it is the manufacturer of the malfunctioning ignition switches. Litigation reports further revealed that although Delphi took up the responsibility to manufacture switches it is GM that is largely responsible since the latter approved those switches before fixing them; plus Delphi had informed GM in early 2002 that the switches underperformed the designated specifications. This means that GM was aware of the potential malfunction for more than a decade but ignored the issue until January of this year. Apparently, the recall was delayed rather than abandoned because it would have cost the company another 97 cents per fix along with an additional tooling cost of around $400,000.

In 2006, when the switches were finally changed on 2007 Chevrolet Cobalts and Saturn Ions they still failed to meet with original specifications designated by the company. Moreover, a case of deception arose since the number was not changed on the replaced switches; instead they have the same number engraved on them as the previously faulty switch model which further caused hurdles in fixing the process.

Since February, the company has recalled 2.6 million vehicles and the total number of recalled vehicles hovers around 7 million. Reportedly, all of the recalled vehicles with defective switches have either been discontinued or are no longer in showrooms. These vehicles include the Chevrolet Cobalt and HHRs, Opel, Pontiac and Saturn Ion models, out of which Pontiac and Saturn are no longer in production.

So far, the company has set aside roughly $750 million this quarter related to repair and rental costs of the recalled cars. The company might even face a civil fine of as much as $35 million that is likely to rise to somewhere around $50 million. These are just the monetary losses that are not as material as the erosion of the brand image of the company. This issue has given room to doubt in the minds of car users and investors alike. What if the company continues to pick costs over human lives and quality of cars? If the company fails to convince its consumers it can expect a significant drop in future sales and this would hurt investors in return.

However, as bad as the situation may be for GM right now history entails that bad times pass and that distressed companies are one of the best investment opportunities out there. It is true that GM is in quite a troubled situation as a consequence of related litigation but it is unlikely that present day issues will weigh down the stock price in the long run. It is highly unlikely that the issues will continue to persist in the future. The company is actively seeking a solution under the supervision of the new CEO, Mary Barra, who is taking all the right steps to turn around the situation. She has already accepted the blame on part of GM and is doing everything in her power to gain customers' trust. She met victims' families privately for emotional support and as an ethical responsibility; plus she is taking steps to improve the quality of future company products.

Note that most of the vehicles with faulty ignition switches were introduced to the market prior to 2009 bankruptcy and restructuring and this shields the "new GM" from incurring any costs related to any accidents prior to 2009. Now the approach of the company is more proactive and more socially responsible as evident by the fact that Barra gave preference to fixing car issues as opposed to accruing excess costs. GM is presently involved in a process to improve the quality of its products and narrow its focus on a specific number of engines. The goals of this plan are expected to be achieved sometime around 2018. As part of the plan, the company is developing Ecotic engines that will be fixed into its smaller fuel efficient offerings.

The company has already begun to emerge out of the lawsuit pile. The company refuted analysts' speculations that sales might take a significant hit by reporting positive figures in its recent monthly sales report. Total sales of the company have increased by 4% YoY while retailer sales went up by 7% YoY. Moreover, GM actually gained some market share in the retail sales sector. Discounts played a major role in boosting the sales efforts and although the company lagged behind some of its competitors' things have begun to look up.

Source: IBTimes

With regard to investor returns, GM has recently instigated dividend payouts with a dividend yield trending higher than the general norm in the industry. The industry average is marked at 2.43%and GM's dividend yield is 3.44%.

In my opinion, it is a very strong buying opportunity for investors. As time passes, the company will rise up to a strong competitive position again. The dividend yield already exceeds the industry average and will rise even further in the future as the company makes global investments, fixes the issues at hand, and enhances its margins.

Source: General Motors - Emerging As A New Trend