Wall Street assesses GM's reputation damage

UPDATED: 3/14/14 4:25 pm ET - adds closing stock price

DETROIT -- The potential hit to General Motors’ reputation from its recall of 1.6 million cars for faulty ignition switches poses a greater risk than the associated financial costs, analysts say.

Wall Street analysts have been trying to help GM investors assess the possible damage to the company’s bottom line and stock price from the recall, which has led to probes by federal regulators, Congress and the U.S. Justice Department.

"We do not see a significant direct financial impact to GM but are monitoring reputational headline risks that threaten to impact GM’s share and pricing, even if temporarily," Citigroup Inc. analyst Itay Michaeli said in a note to clients today.

Michaeli said his analysis of big recalls of over the past five years -- ones involving at least 1 million units, across multiple vehicles and model years -- generally showed little lasting impact on an automaker’s market share and transaction prices.

The Toyota recall for unintended acceleration in 2009 and 2010 was an exception: Toyota lost 1.5 percentage points of U.S. market share in 2010, slipping to 12.8 percent, according to the Automotive News Data Center.

Michaeli says GM’s recall is “reminiscent” of Toyota’s crisis but involves far fewer cars and also models that are no longer in production.

Other analysts have pegged GM’s cost of executing the recall at a relatively small $100 million or less.

RBC Capital analyst Joseph Spak, in a note this week, estimated that the part needed for the fix costs $2 to $5. Even factoring in labor costs at the dealership, the total cost would run in the $80 million range.

Likewise, the fine GM faces if the National Highway Traffic Safety Administration finds that the company did not meet it duties to notify the agency of the problem is capped at $35 million, not enough to spook investors, Stephen Brown, senior director of corporate finance for automotive at Fitch Ratings, said in a note today.

For context, GM in 2013 recorded pretax earnings of $8.58 billion, after adjusting for one-time gains and losses.

But Brown warns that potential legal liabilities and the cost of future settlements are unknown and “could be significant.”

GM for now is shielded from lawsuits stemming from accidents that happened before its July 2009 bankruptcy, because it is now a different legal entity. But “the actual impact on GM will depend on how the courts view these claims and what legal avenues might be available to plaintiff,” Brown writes.

This week auto safety advocate Clarence Ditlow and former NHTSA administrator Joan Claybrook, who have criticized GM for not issuing a recall sooner, called on the company to create a $1 billion trust fund to compensate victims of safety defects in its vehicles.

That amount is in line with Guggenheim Securities analyst Matthew Stover’s estimate of $1 billion to $1.5 billion in legal judgments and settlements that GM could face from the recall, according to Reuters.

Analysts say the extent of any reputation damage will be dictated by the public’s perception of GM’s response to the crisis.

"GM clearly has a test on their hands," Spak wrote. "How they manage it will likely impact the reputational risk."

On Wall Street today, GM rose 1 percent to close at $34.09 a share. Over the past 12 months, the shares have traded between $27.11 and $41.85.

You can reach Mike Colias at autonews@crain.com



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