General Motors Company (NYSE:GM) announced five more product safety recalls yesterday, part of its commitment to act more quickly when facing a potential threat to drivers’ safety following the late recall of faulty ignition switches that have been linked to at least 13 deaths earlier this year. The current recalls affect up to 3 million cars and the mechanical problems are thought to have contributed to up to 17 accidents, 2 injuries, and no deaths.
New recalls will cost up to $200 million
General Motors Company (NYSE:GM) estimates that the new recalls will cost as much as $200 million for repairs and other costs, causing J.P. Morgan analyst Ryan Brinkman to reduce his 2Q14 estimate for GM North America EBIT from $2.8 billion to $2.6 billion, but this still leaves the company with a 10% margin, higher than rival Ford Motor Company (NYSE:F)’s and the highest margin so far this cycle. He also dropped 2Q14 estimates from $1.00 to $0.92, but doesn’t see the cost spilling over into future quarters.
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“There are no changes to any of our estimates for other periods or to valuation. Furthermore, we are reassured along several fronts after speaking with the company,” writes Brinkman.
Ignition switch recall may help General Motors by driving dealer traffic
First, General Motors Company (NYSE:GM) is providing guidance that its sales haven’t suffered from the media fallout of the first round of recalls, which can probably be attributed to the company’s robust (if late) response to the problem including providing rental cars while repairs are being made and helping customers trade in for a new vehicle if they choose. Ironically, Brinkman thinks that it’s possible the recall debacle has helped General Motors by generating traffic for their dealers. He also notes that the number of rental cars has peaked, which is a falling cost in its own right but also means that the number of owners who have yet to bring in their car for repairs is dwindling. At this point, the $1.3 billion that General Motors set aside to deal with costs from the ignition switch recalls looks conservative.
The new recalls also show that General Motors Company (NYSE:GM) understands that it can’t take any chances being loose with customer safety. A strong response to one lapse may be enough to reassure buyers that GM cars are safe, but a string of such unreported safety problems would be hard to recover from.