Auto Recalls = Stock Falls?

The investigation into the General Motors (GM) ignition switch recall of more than 3 million vehicles is widening in light of recent news that GM approved the design of the switches, even though the company was aware that the switches did not meet specifications. This latest automotive recall is linked to a defective ignition switch that has led to the deaths of 13 people and a total of 31 crashes. With congressional staff looking into the details of the recall (including a specific timeline of GM’s knowledge concerning the defective switch) the company’s stock has experienced a steady decline in the  market.

GM originally announced their initial recall in the beginning of March, and at that time, 4 out of 4 top analysts were willing to recommend BUY GM. Deutsche Bank analyst Rod Lache recommended BUY GM arguing that compared to Toyota’s unintended acceleration issue in 2010, “which led to large market share declines. The impact on GM isn’t expected to be as large.” Rod also noted that, “consumer reaction to concerns about unintended acceleration appear to be significantly higher than concerns regarding other safety defects.” The stock, for now, has headed in a negative direction, leaving Rod with -1.1% over S&P-500, but he is still convinced of a turn around. 

 

 

A month later, top analysts are more concerned about the overall automotive market than any recall, and are saying SELL GM. Morgan Stanley analyst, Adam Jonas, recommended SELL GM on April 11 arguing, “GM and its peers will face more hurdles as the global auto industry enters a period of “significant” disruption amid technological advances.” Adam added, “GM will need to muster every bit of its financial and technological resources to make the transition to advanced powertrains, connected vehicles and, ultimately, autonomous cars. A peaking core U.S. market adds a near term challenge.” Adam’s SELL recommendation coincides with the recall investigation, yet, his advice is in response to the overall market trend. 

While the auto industry starts to adjust to the changing trends, recalls are still happening more often than we would like to think and are usually in response to automobile-related casualties or death. In addition to creating unease amongst the public, one of the many consequences resulting from a recall seems to include a dip in the company’s stock. Car companies such as Toyota (TM) and Honda (HMC) have also had to announce the recall of particular makes and models of cars, and their respective stocks dropped immediately following these announcements.

However, historically, for long term-investors, these recalls have little to do with stock performance.

In January of 2010, Toyota (TM) ended up issuing two recalls over one issue. In 2010, 6.67 million cars including, Camrys, Corollas, Highlanders and Tacomas, caused unintended acceleration of the vehicles. The company replaced the floor mats that could jam the accelerator pedal and they replaced a possible sticky accelerator-pedal mechanism. After a small peak in January before the recall, the stock then dropped from $91.14 to $73.35 by the end of February.

However, a year later, Toyota was able to turn its stock around and reach above the peak of $91.14 with $93.20 on February 14 of 2011. 

And in May of 1995, Honda (HMC) had problems with their plastic seatbelt-release buttons on several models including Integras and Civics, forcing the company to issue a recall. After 3.7 million vehicles were recalled due to this faulty seatbelt-buckle, the stock dropped from $8.21 at the beginning of May, down to $6.78 in the middle of June of that year. But, HMC stock was soon back on the rise, hitting $8.51 in August of that year.   

Are people accustomed to such recalls or are investors focusing on the strength of this companies rather than the immediate setback? Top analysts are waiting to see positive returns on their BUY GM recommendations, choosing to focus on the strength of the company versus the safety disaster. But, will these leading analysts come out on top of this PR nightmare, or will they be recalling their BUY recommendation?

Uri Gruenbaum is the CEO of TipRanks