Uncertainty continues to shroud General Motors' (NYSE:GM) stock price from escalating. The company began accepting claims for its faulty ignition switch compensation program a few days ago, and several hundred claims are expected to be put through the system. The company has earmarked about $400 million for the program for now. The money is an estimate for now, and is not capped. Plaintiffs taking any sort of payout would not be eligible to sue the company at a later point in time. So what does this all mean?
As my opening statement says, uncertainty continues to shroud the stock price from climbing higher. Nobody likes to be in the dark about anything they are invested in; transparency is paramount to be able to manage the expectations of your investors. Let's take a different example from earlier this year, but from a completely different sector. Consolidated Edison (NYSE:ED) had a gas line leak, which caused a fatal explosion in a New York apartment building back in March of this year. As of its most recent earnings report on May 9, 2014, the company still didn't have any idea how it would be affected monetarily due to several law suits, and the stock price was punished because of the uncertainty.
What GM is trying to do now, though, is push some of the lawsuits pertaining to the ignition switch issue off to the "old GM". This act of legal and financial wizardry is to try to keep the litigation of some of the cases off of "new GM", so that the balance sheet isn't affected by much. I understand why GM is trying to do this, but until we see a couple of years without any recalls, the "new GM" is still the "old GM".
But in the case of the uncertainty surrounding GM, there is a whole lot of certainty with respect to car sales. Sales and volumes just keep increasing. The July numbers are out, and the company showed a 9.4% gain in unit sales, while retail sales increased 9%. The company, however, did state that transaction prices were flat when compared against June, but were up $2,000 year-over-year. So the recall news doesn't seem to be bothering the consumer much, as we've seen consecutive sales increases for several months now. The price per transaction increase was due in large part to increased sales of SUVs and crossovers, which carry higher margins. The newly designed Cadillac Escalade had sales increase a whopping 32%, while the Chevy Camaro increased by 25%.
So now that we know GM keeps selling more and more cars every month, we now have authorities investigating the company for GM's role in sub-prime lending on auto loans. As back in the sub-prime mortgage days of the housing bubble, sub-prime auto lending is the same thing, but with cars. This is where loans are given to consumers with less than adequate credit. The investigation is still underway, so there is no telling yet as to how extensive any fines will be, or if there are even going to be any fines.
I think we are still just in probably the fifth innings of the auto trade, as the average age of vehicles on American roads these days is still about 11 years old. Prices and volumes continue to increase month after month, not just for GM, but for almost all car makers. Though there is still quite a bit of uncertainty surrounding the stock, there is clear indication that the products the company produces are desired by the consumer. I, for one, don't envy CEO Mary Barra's position right now, because it is a daunting one.
Though the company has a couple of ominous clouds hanging over it, with a patch of blue skies on the horizon, I still believe this stock to be undervalued at the moment. But it is undervalued for a reason, the reason of uncertainty. I believe that once we get crystal-clear definitions to the costs of the recalls and cost of any sub-prime lending issues, then, and only then, can the stock can jump higher. For now, the market is still taking a bloodbath, and GM is falling in kind. The stock also did take a pounding on the back of earnings, and I believe that it has come down to the point of where I'm going to make a purchase in it shortly.
Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!
Disclosure: The author is long GM, ED. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.