GM investors unshaken as recall cuts $3 billion in stock market value

UPDATED: 4/7/14 4:21 pm ET - adds Monday stock close

NEW YORK (Bloomberg) -- Many institutional investors in General Motors Co. say they’re keeping faith in the stock after the recall crisis wiped out more than $3 billion in shareholders’ value over four weeks.

CEO Mary Barra has apologized for the lives lost in accidents tied to an ignition switch defect and promised an aggressive investigation into why it took so long to do anything even though some at GM knew about the faulty switches as early as 2001.

“Why in the world they didn’t deal with it back then is beyond me, but it seems to me now that they’re doing the best job they can given the circumstances,” said Scott Schermerhorn, chief investment officer of Granite Investment Advisors Inc., which oversees $600 million and as of Dec. 31 owned 464,469 GM shares. “Barra is being very candid.”

Last week a contrite Barra, who’s been CEO since January, fielded sharp questions during hearings in the U.S. House and Senate. Congress and the Justice Department are investigating what happened before GM recalled 2.59 million small cars in February and March.

While the fallout might briefly crimp sales, the stock drop is excessive, said Matthew Moran, a fund manager at River Road Asset Management LLC, which manages about $11 billion and owned 183,158 GM shares as of Dec. 31.

GM shares -- which climbed 42 percent in 2013 amid record North American profit -- have slumped 7.6 percent since March 7 as the crisis escalated, the company expanded the recall and the Justice Department opened its probe. In the meantime, Ford Motor Co. advanced 3.3 percent.

GM shares today closed down another 2 percent to $34.11.

'Tough situation'

“It’s a little silly that it’s traded off to the extent that it has,” Moran said of General Motors. “The new CEO is doing a fine job, and I’m very optimistic about her abilities to lead this company.”

Moran and Schermerhorn both pointed to what happened at Toyota Motor Corp. after it recalled more than 10 million vehicles following complaints of sudden, unintended acceleration. While revenue fell amid the recalls, which took place in 2009 and 2010 during the global recession, it’s increased since. Analysts forecast record sales for the company in fiscal 2015, according to data compiled by Bloomberg.

Still, the company’s reputation was damaged, and it relinquished its title as the world’s top-selling automaker to GM for a year. Toyota last month admitted it misled consumers and agreed to pay $1.2 billion to end a U.S. probe of its attempt to hide the defects.

Other challenges

At GM, Barra has been “dealing with the issue head on,” said Jordan Smyth, a managing director at Edgemoor Investment Advisors Inc., which owned 201,944 GM shares as of Dec. 31 and oversees about $725 million.

“I’ve been impressed with how they’ve been handling it,” Smyth said. “It’s a very tough situation for any new CEO to come into. There’s already a lot of scrutiny of her solely because she’s a woman in a position like this, being the CEO of one of the biggest companies in the world.”

He said he sees any impact on sales in months to come as a “short-term issue at worst.”

The crisis has already reduced the multiple investors are willing to pay for GM’s shares relative to the automaker’s sales and profits. GM last month was valued at 0.31 times revenue and 10.8 times earnings, the lowest multiples since the second quarter of last year, according to data compiled by Bloomberg.

Product weakness?

Part of the stock’s decline has to do with concerns about challenges overseas, and weakness in some of GM’s product lines.

The automaker is seeking to break even in Europe -- where it has lost more than $18 billion since 1999 -- and is taking a $400 million charge related to the Venezuelan currency. At home, the Chevy Silverado full-size pickup was outsold by Chrysler Group LLC’s Ram last month, while Cadillac luxury brand sales slid 7.3 percent through the first quarter.

Still, GM’s U.S. vehicle sales rose 4.1 percent in March, exceeding analysts’ expectations. And even after the recent sell-off, GM trades higher than many peers on a price-earnings-ratio basis. The company’s ratio (before today's trading) of 11 tops Ford’s 10.4 and Toyota’s 10, according to data compiled by Bloomberg.

Buying opportunity

Spokesmen for the two largest GM stakeholders -- a union health-care trust and the Canadian government -- declined to comment. The union trust held 140.2 million shares, or 8.8 percent of the shares outstanding, as of Dec. 31. The Canadian government holds 110.1 million shares, or 5.6 percent, after selling 30 million shares in September.

Gerry Jordan, president of Hellman Jordan Management Co., said the recall crisis was an opportunity to buy. On average, analysts estimate the price will reach $44.88 in the next 12 months, 29 percent higher than its April 4 close, data compiled by Bloomberg show.

“The stock has acted poorly this year, but it hasn’t acted immeasurably worse than other global auto manufacturers,” said Jordan, whose firm oversees $950 million and as of Dec. 31 owned 99,063 GM shares. “GM is still a buy.”

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