General Motors is feeling the heat.
America’s second-largest automaker is under investigation by the federal government surrounding GM’s reaction to faulty ignition switches in several GM models. Last month, the company recalled 1.6 million cars to deal with the problem it said caused a dozen deaths. However, the watchdog group Center for Auto Safety says as many as 303 people died when the ignition switch turned the vehicle off, shutting down the airbag system in the midst of an accident.
While the replacement parts only cost a couple of dollars and the company is now giving $500 discounts on future car purchases to recalled vehicle owners, the feds are investigating whether or not GM knowingly avoided repairs in the past to save a little bit of money.
The markets have already punished GM by cutting the company’s market cap 9% as the stock dropped to just above $34 per share.
CNBC contributor Gina Sanchez, founder of Chantico Global, believes the company can weather the storm as well as some of its competitors in the past.
“What's really shocked the markets is not that there was a recall – because unfortunately, recalls are part of the cost of doing business,” says Sanchez. “If you look at the top five largest recalls in the last 10 years, four of the five largest recalls were Ford. So, it’s not that this doesn't happen. And, it's not as though companies don't recover.”
Sanchez notes Toyota also was able to get through its recalls from half a decade ago when some of its vehicles were unintentionally accelerating.
“Toyota also recovered,” says Sanchez. “If you want to pattern [GM’s recall] after that, it actually will at some point make its way out of the general consciousness.”
Though Sanchez sees a boost in sales coming in the spring as the auto industry recoups lost winter sales, she doesn’t believe GM is a good buy in the short-term.
“Right now, I would say buy a better company,” says Sanchez. “Buy Ford because [GM is] probably going to lose sales to another company, probably Ford.”
For the long-term, however, Sanchez sees General Motors bouncing back. “They do actually have good prospects,” says Sanchez. “And, this total costs – even if you assume the litigation risks –probably $500 million. I think they can afford that.”
CNBC contributor Andrew Busch, editor and publisher of The Busch Update, also thinks GM’s stock will have a bit of a rough time in the short-term.
According to Busch, GM’s two-year stock chart shows that it recently broke below an upward-sloping trend channel at around $37.50 per share.
“This stock is looking like it will make a new low again,” says Busch. “Look for a test below $33.50. When you get uncertainty, this is what happens and it sets up for further losses before it can stabilize.”
To see the full discussion on General Motors with Sanchez on the fundamentals and Busch on the technicals, watch the video above.
- Automotive Industry
- General Motors