All the recent news from General Motors seemingly has been bad news.
GM repeatedly recalls hundreds of thousands of vehicles, totalling about 20 million this year, including the latest recall Friday. GM CEO Mary Barra appears before the U.S. Congress to explain why GM stood by while its cars were linked to 13 deaths of its customers. Analysts tally up the economic impact and suspect the auto maker is on the hook for billions of dollars in fines, penalties and settlements.
And yet, GM stock is closer to its 52-week high than its low, up 17 per cent from its April nadir. At first glance, it suggests investors may be underestimating the scope of the auto maker's problems. The analysts who follow the company say, rather, that Wall Street is deciding that the worst is over and that there's little evidence the string of negative headlines is actually hurting GM's ability to sell cars.
That, then, turns the debate to the longer term. And while the stock has plenty of admirers – the average analyst target price suggests another 17 per cent appreciation over the next year – some of the company's future success surely depends on Ms. Barra fixing the corrosive culture that led to GM's current problems.
GM first detected a problem with some of its ignition switches more than a decade ago. Because of a lack of tension in the switch, the car's engine could suddenly shut off. By the middle of the past decade, some owners of GM cars died or were severely injured as their cars lost power and their airbags failed to deploy.
According to a GM-commissioned report, the auto maker "heard over and over" of the problem from customers, dealers, the press and their own employees, but failed to take action. Finally, over the past several months, GM has recalled millions of vehicles and, upon the release of the report, fired 15 employees, including some executives.
"This is indicative of a lack of a restructuring," says analyst James Albertine, of Stifel Nicolaus. "There's a certain air across the organization historically – and it wasn't even different in 2008 when they were on the brink [of collapse] – that they were the biggest and baddest, and could do no wrong. The GM way or the highway continued to be the strategy, even though they'd lost market share pretty consistently for 40 years."
"It's at the heart of the matter of 'new GM,' " says analyst David Whiston of Morningstar. "You can talk about great product, but can they change the culture at the company? It's taken far longer than anyone, including me, has expected. … This recall issue shows there's still a problem. Yes, a lot of decisions that caused the problems were made during 'old GM's' time, but a lot of those people were still there until the 15 people got fired."
Let's focus on a couple parts of Mr. Whiston's comments. "Old GM" refers to the debt-laden maker of inferior automobiles that the U.S. and Canadian governments ultimately bailed out in 2009. "New GM" refers to the company that emerged from that restructuring with a healthy balance sheet and a new line-up of vehicles – the "great product" – that won praise from critics and a fresh look from consumers. This is the core of the "buy" case for GM right now.
GM's recent sales suggest that, if anything, the government bailout bothered more customers than the recalls have. The models linked to deaths are no longer on the market, with the Chevrolet Cobalt replaced with the Cruze, which is a "fantastic car" in comparison, Mr. Whiston opines. The company's March, April and May sales numbers "have all been excellent," Mr. Whiston says, with May the best month since August, 2008.
"Broadly speaking, it's about great product, and GM has great product that's getting people into the showrooms and paying higher prices for vehicles, which means bigger profits," he says. "You don't have to give the cars away any more."
Mr. Whiston, who believes North American vehicle sales will continue to grow over the next several years, estimates the "fair value" of GM shares at $53 (U.S.) apiece, more than 40 per cent above Friday's close of . And that's after reducing his estimate by $4 per share for a potential $7-billion in victim compensation and other penalties. (He says he suspects that's too high, but would rather not have to cut his estimate again if he's too low.)
It's worth noting, however, some of the more pessimistic views. Mr. Albertine of Stifel has a "hold" rating on GM shares in part because he's not as impressed with GM's vehicles as Mr. Whiston is.
Adam Jonas of Morgan Stanley cut GM to the equivalent of a "sell" rating, with a price target of $33, in April. He believes that the U.S. "auto replacement cycle" is over, and the cost to auto makers to goose growth will be high. Competition and change across the auto industry, including from electric-vehicle maker Tesla Motors Inc., will require more capital expenditure, cutting into cash available for dividends and buybacks. And Mr. Jonas sees the potential for weaker sales in emerging markets cutting 25 per cent from his previous estimates of GM profits.
Some of these factors might be secondary, however, if GM can't fix the culture that sat paralyzed as its ignition-switch problems snowballed. Mr. Albertine thinks Ms. Barra, who has instituted a new "Speak Up For Safety" program, "is doing a phenomenal job in trying to right the ship."
Morningstar's Mr. Whiston sees it as an obvious, and necessary, change. "One, ethically it's the right thing to do, because if you have a problem, you need to fix it. Two, it's so short-sighted to not recall something because of cost. Look what it leads to: The cost they will pay out to make this go away will be in the billions. They would have been better delaying the Cobalts, fixing the stupid switch, and they would have saved a lot of lives and a lot of money."
The author owns stock in both General Motors and Ford Motor Co.
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David Milstead