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Bear of the Day: General Motors (GM)

Tracey Ryniec

You know that things aren't going a company's way when its CEO is targeted on a Saturday Night Live skit as General Motors' (GM) Mary Barra was recently. This Zacks Rank #5 (Strong Sell) has been under fire for a faulty ignition switch problem that goes back a decade.

General Motors is one of the largest automobile companies in the world with 396 global facilities. Its brands include Chevrolet, Buick, GMC, Cadillac, Baojun, Holden, Isuzu, Jiefang, Opel, Vauxhall and Wuling. It also has joint ventures in China.

Faulty Ignition Switch Recall

In February 2014, GM informed federal regulators that there was a safety-related defect in its ignition switches on cars dating as far back as 2003. Initially, it recalled over a million vehicles which were still on the road but that recall has since grown to 2.6 million cars.

Analysts estimate the costs of the recall at well over $100 million.

Class action lawsuits and other legal proceedings have already been filed against the company but liability will likely be limited due to General Motors' bankruptcy in July 2009. Its liability is limited to incidents happening before 2009.

GM isn't the only auto maker with a large recall as Toyota recently announced a 1.77 million recall in the United States but its safety issue hasn't resulted in any deaths.

GM, however, said its ignition flaw has been linked to 31 accidents and 12 deaths in the U.S. and one in Canada.

On Apr 9, the National Highway Traffic Safety Administration announced it had begun fining General Motors $7,000 a day, the maximum it can impose, for not answering all 107 of the Administration's questions by the Apr 3 deadline on why it took so long to recall the cars when the flaw was allegedly discovered in 2001.

It is a public relations nightmare for GM after the company had been lauded for its stunning turnaround after the government bailed it out in the Great Recession.

Business Fundamentals Still Solid

The auto sector has been hot. While weather depressed sales in the United States for the first two months of the year, they bounced back strongly in March with the best monthly sales results amongst the industry in 7 years.

General Motors saw sales up 8% year over year led by strength in the Chevy Malibu and large trucks.

But analysts have been cutting 2014 estimates on the company since the recall was first announced.

The 2014 Zacks Consensus Estimate has sunk like a rock, dropping to $3.70 from $4.63 just 90 days ago. Still, even with the cuts, that is solid earnings growth of 16.7%.

Shares Have Sold Off

GM shares had been on a roll in 2013 but the recall publicity has hit them hard.

Shares are cheap though. They trade with a forward P/E of just 9.3 but the ignition switch recall issue isn't going to go away any time soon.

For investors who don't want to deal with the recall publicity but still want to own an auto maker, Tesla (TSLA) is a Zacks Rank #1 (Strong Buy) and is expected to see triple digit earnings growth in 2014.

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

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