GM Stock: 3 Reasons You Shouldn’t Cheer Just Yet

General Motors manages to post a Q1 profit despite recall charge, but headwinds remain

   
GM Stock: 3 Reasons You Shouldn’t Cheer Just Yet

Analysts’ low expectations helped deliver an earnings beat for General Motors (GM) on Thursday, but make no mistake: The automaker faces strong headwinds stemming from a recall fiasco that shows no signs of letting up any time soon.

GM185 GM Stock: 3 Reasons You Shouldn't Cheer Just YetIn the wake of global recalls of more than 6 million vehicles worldwide, analysts who thought quarterly GM earnings could swing to a loss for the first time since the automaker drove out of bankruptcy nearly five years ago were pleasantly surprised. GM earnings fell to $108 million (6 cents a share) in the first quarter, down more than 85% from the $873 million (58 cents a share) GM reported a year earlier.

Wall Street had expected GM earnings for the quarter at about 4 cents a share. Still, the beat did give GM stock some lift — shares bounced by more than 3% before beginning to wilt by midday.

The skunk at GM’s garden party: $1.3 billion in recall expenses that executives on the company’s earnings call attributed to parts costs.

And there are a few more issues that GM stock holders get to fret about, to boot:

Government Scrutiny: The GM recall crisis will not disappear anytime soon. Of most pressing concern: the 2.6 million vehicles with faulty ignition switches that have been linked to at least 13 deaths and more than 30 crashes over the past decade. Earlier this month, two Congressional subcommittees grilled General Motors CEO Mary Barra about whether the automaker might have purposely hidden the defects — or withheld information about liabilities stemming from the during its bankruptcy and government bailout. Count on lawmakers to keep looking for the proverbial “smoking gun” as they dig deeper into hundreds of thousands of pages of documents that GM has provided so far.

Legal Perils and Perceptions: Despite the fact that GM has tasked Kenneth Feinberg with looking into whether or not GM owes owners of the faulty vehicles any compensation, the company has gone to a federal bankruptcy court to block more than 50 lawsuits related to the faulty ignition switches. Although the company says it is not seeking protection from lawsuits involving crashes, deaths or injuries, the news is not sitting well with many consumer groups and owners. Another risk to GM stock: trying to make lemonade out of lemons too soon. Barra and others believe that when vehicle owners come into dealerships for recall service, it will be a good opportunity to sell them new cars. Done poorly, it could be a public relations nightmare for GM and another risk to GM stock.

Global Challenges: GM earnings took a $400 million hit from Venezuela’s exchange rate change, but that might not be the biggest global impact as the year wears on. GM’s decision to bring Russia under its GM Europe umbrella at the beginning of this year could make it more difficult to lift the struggling unit to profitability. GM’s European subsidiaries Opel and Chevrolet are strong foreign brands in Russia, but the recent saber-rattling between Russia and Ukraine is more than worrisome. While Ford (F) and others can take a hit from Russia, GM’s St. Petersburg factory and AvtoVAZ joint venture are important investments.

Bottom Line

The good news: GM earnings for the fourth quarter could have been worse. The bad news: GM stock has a long road ahead before it drives out of the recall crises and the headwinds in Europe, Russia and Venezuela.

GM might well succeed in arguing that any liabilities not directly related to deaths or injuries were discharged by the company’s bankruptcy. Once the “New GM” emerged, technically, it was not liable to compensate vehicle owners for the bad actions of the “Old GM.”

But even if GM prevails in court, it’s far from immune from judgment in the court of public opinion — or from federal and state governments charged with protecting consumers.

Despite the GM earnings beat, shareholders should buckle up: It’s likely to be a bumpy ride.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, http://investorplace.com/2014/04/3-reasons-gm-stock-earnings/.

©2014 InvestorPlace Media, LLC

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