Recalls Drag General Motors Down to Sell - Analyst Blog

On Jun 25, 2014, Zacks Investment Research downgraded General Motors Company GM to a Zacks Rank #4 (Sell) from a Zacks Rank #3 (Hold).

Why the Downgrade?

General Motors has been facing extensive negative media coverage recently over a spate of recalls as well a large fine. This has led to downward estimate revisions over the last few months.

In the last 30 days alone, 4 out of 9 analysts covering the stock reduced their earnings estimates for 2014. As a result, the Zacks Consensus Estimate for General Motors' 2014 earnings per share fell to $3.12 from $3.17 during this period. Moreover, this estimate implies a 1.47% decline in earnings from 2013.

General Motors' recent earnings results have also been below expectations. The company reported negative earnings surprises in the last 2 quarters, while the average surprise over the last 4 quarters was a negative 3.57%.

General Motors has announced 44 recalls this year, covering over 20 million vehicles in North America alone. It will have to incur a charge of $700 million in the second quarter of 2014 for repairing the vehicles recalled during the quarter. It recorded a $1.3 billion charge for recall-related repairs in the first quarter.

Additionally, General Motors agreed to pay a fine of $35 million to the U.S. safety regulators for the late recall of 2.6 million cars with faulty ignition switches. Currently, this is the maximum amount the government can fine a company.

General Motors is also facing many lawsuits and investigations related to the issue, which also resulted in negative publicity. Last week, a $10 billion lawsuit was filed against the company demanding compensation for millions of its car and truck owners for the loss of resale value of their vehicles. All these factors have led to decline in shareholder value.

Other Stocks to Consider

Some better-ranked automobile stocks worth considering are Dorman Products, Inc. DORM, Standard Motor Products Inc. SMP and Douglas Dynamics, Inc. PLOW. All these stocks carry a Zacks Rank #2 (Buy).