Why GM's stock is weathering the recall storm

The company is actually using the bad publicity to its advantage.

By Benzinga Jul 3, 2014 4:38PM
Caption: The General Motors logo is seen on display at an auto show in Detroit
Credit: © Paul Sancya/APBy Joel Elconin

First and foremost is the issue of safety.

General Motors (GM) must do everything it can do to ensure the safety of its vehicles. Also, it must live up to its responsibility to compensate customers or the families of customers that have been negatively impacted by the recall.

The company has admitted responsibility, but not fully explained why it took so long for the problems to be revealed to the public. Nevertheless, shares of GM have weathered the storm quite well over the last five months.

In fact, GM is trading at a higher level than it was when the first round of massive recalls were announced on February 25, $36.10 versus $38.05 in Wednesday's session.

Shortly after testimony by company CEO Mary Barra on April 1, GM bottomed at $31.70 on April 11. Despite the subsequent recalls after that, culminating on June 30 when GM announced a recall of an additional 8.45 million which brought the total to a staggering 29 million cars, the issue has grinded higher.

Not only has the share price moved higher, but the company has stunned Wall Street with its June sales figures, which showed some of the strongest monthly data since 2007. This comes on top of an upside surprise in May, with growth of 12.6 percent versus estimates of 6.4 percent.

GM sales were up slightly at 1 percent versus estimates of 6.3 decline for the month, getting a huge boost from their Buick brand which was up 18.4 percent. Analysts wrongly anticipating customers would avoid GM brands in the midst of the recall debacle.

Increased traffic at dealerships

So if sales have been increasing during barrage of recalls, what is the catalyst driving sales as well as the share price higher? GM is using the bad publicity to its advantage. With millions of customers having to frequent dealerships for repair, GM is ramping up its marketing, rebate and financing campaigns.

Morgan Stanley's Adam Jonas has been hypothesizing this theory for some time now, writing most recently that, "GM is taking control of its US commercial position, showing real market share resiliency despite the very negative PR surrounding the recall. This is thanks to dealers flooded with hundreds of thousands (ultimately untold millions) of customers they would have never normally seen at this part of the cycle who are coming in with recall slips."

In other words, without having to pay hefty advertising fees, the mainstream media is providing GM with a huge marketing campaign at no expense to the company.

Once these customers arrive for a repair, they may be swayed into driving away in a brand-spanking-new GM car after trading in their recalled vehicle for a new model with zero percent APR financing for 72 months.

Along these lines, GM is offering enticing rebates for the month of July, with current corporate incentives that include zero percent financing for 72 months. The company may even take a page out of the playbook of Chrysler --  which turned things around in 2007 by offering Lifetime Powertrain warranties for their 2008 models. Throw in a rock-solid warranty, additional dealer specific offerings on top of rebates, and GM may even continue its back-to-back performance of rising sales.

Of course, GM would have rather avoided the recall debacle entirely, but since it has occurred the company has used the free publicity to its advantage. Capitalizing on the unexpected traffic to their dealerships, by offering incentives that customers cannot refuse as evidenced by the staggering sales figures for May and June.

From a technical perspective, the moment of truth has arrived, as GM flirts with a very important resistance at $38. That level represents a triple top in early March, on its first attempt to rebound from its first round of recalls.

Where do shares go from here?

In Thursday's session, GM has exceeded that level, reaching $38.15 after taking out huge institutional sellers at $38. But it has since fallen back under $38, as there was not enough retail buying above it, to allow the short-term buyers at $38 to exit their positions with a profit. As a result, they are attempting to wiggle out of their non-profitable position with a limited loss.

If, in fact, GM can clear this important level with a series of closes above $38, it may pave the way for a test of its all-time post IPO high -- made back in December at $41.85.

More from Benzinga
Jul 4, 2014 6:18AM
Funny Govt. Motors weathers ALL STORMS VERY WELL on the tax payers dime.
Jul 4, 2014 5:00PM
The only reason the stock is not down to single digits where it belongs  is because the shares are not widley held The few main shareholders are all in the game to keep it propped up The ultimate game until they can sucker the public in then bail
Jul 4, 2014 10:08AM
Next time GM heads into bankruptcy no bailout, just let them fold as the other auto companies WILL take up the slack with the new jobs created because of it. 
Jul 3, 2014 9:40PM
Americans proved how stupid they were when they re-elected ODUMBO
Jul 4, 2014 12:22AM
How many billions of dollars per month is the FED funneling into that piece of crap TBTF (GM) nonsense that can't build cars?
Jul 4, 2014 4:26PM
Isn't it funny how most cities go bankrupt after the company pulls out, but Detroit goes belly up while GM is still there.
Jul 4, 2014 7:18PM
You forgot to mention GM's "employee pricing" where millions of recall customers are eligible for "employee pricing" + rebates / incentives on new GM vehicles.   The primary reason analysts have missed GM sales forecasts for the last two mos.
Jul 4, 2014 4:30PM
Oh, let's be fair.  Remember, our economy was on the verge of complete collapse....really.  Bail this and bail that on taxpayers "penny"....as we are broke.  Government is broke and broken and, if one time, the markets were allowed to react given "actual" fundaments this would never have approached the insanity we have now. Bogus is the world we live in and the USA and this idiot in office lead the way ..... down.  It is going to cost more than a "penny" this time.
Jul 4, 2014 12:14PM

Nobody really gives a damn whether you buy a GM car or not...We don't care.

You that think everything built by a Foreign(owned) Company is great, haven't lived long enough.

As far as bailouts, GM, Chrysler (a private now going foreign/FIAT) and even Ford received government monies....Ford was in debt to Government before bailouts, and refused actual bailout at the time others took it.

And Foreign based corporations, have received millions if not more, in tax abatements and incentives to build in depressed areas of the States, in either Local, State or Federal dollars.

Many of you should quit trying to bullsh1t the public about GM being the only one to get tax dollar help....Assuming you work or have family members, building Hondas or Toyotas.

Jul 4, 2014 4:25PM
When does the national nightmare that is GM end?
Jul 5, 2014 8:40PM
They and the UAW owe American taxpayer! 32 billion. "Period"! No one should buy a GM until they do a payback set up!
Jul 3, 2014 8:02PM
They got $4.2billion of tax payer money they never paid back from the Obama give away. That will help  pay the bills from this deal. If they need money the Fed will help.
Jul 6, 2014 11:22AM

GM's weathering the storm because they got bailed out with $50,000,000,000 from Obama when they should've been put in bankruptcy along with about 5-6 large banks.

Jul 4, 2014 11:41AM

Who is GM trying to fool with their projections and figures and how many more of their vehicles still have to be recalled. do we have to wait another week for this announcement.and how canthe new CEO say that she knew nothing about this  or does GM just bring someone into this position with no management experience.

Jul 4, 2014 5:03PM
I heard GM makes Cadillac Hurst's  They should provide one with each car they sell Thus providing the full service to the families that remain  
Jul 4, 2014 7:16PM
It's the same old, it's the same old song & dance my friends! I just have to read 5 posts & its the same old song & dance my friends...Happy 4th you relentless ****-bites! Now post reply's about me lol.....same old song & dance my friends...
Jul 7, 2014 7:20AM
GM cars are so bad they are recalled before they are even made. The last GM car I bought was in 1967 it was a piece of crap and I don't thing anything has changed.
Jul 7, 2014 8:33AM
Government Motors stock is kept high because every liberal I know has bought it.  And don't forget all the NYC liberal stock traders on Wall St pushing this toxic equity.  But as Ford continues to kick GM's a_ss around the world, this worthless stock will be less than $10 a share.  

Not sure how we let the 2 most liberal, free-spending presidents in US history, Bush and Owebama, get away with this scam on the taxpayers.
Jul 5, 2014 11:51PM

hmmmm, I wonder how much tax, (all taxes) that the bailed out companies and workers "pay to all

taxing authorities";

And then we have Suppliers to the industry, along with Dealers and salesman and support staff ....

Other associated business' or mom and pop places that survived, because of Auto workers and their families spending money...


Jul 7, 2014 11:36AM

A lot of things have changed in the Auto business since 1967...

Glad I'm not living in the 60s man, like you. But we did have fun, except for the War.

I look out back and see a couple of GMs or Chevys we drive, one is about 17 years old, the other is only a couple...Very little problems or few complaints..

Probably when I buy her another new car it will be a GM product.

We will get something you will never get, a "loyalty discount" and then the best deal we can make.

You will never know that feeling, because you haven't bought GM since 1967...Oh well..

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