GM: UBS Lowers Price Target On DOJ Effects, But Maintains BuyVW Staff
UBS analysts Colin Langan and Rahul Chadha look at General Motors Company (NYSE:GM) in light of its recent recall and subsequent DOJ investigation, noting that while on the surface things don’t look great, there are enough underlying positives to maintain their Buy rating on the stock.
GM: Tough start to 2014 creates attractive entry point
Following news of a possible DOJ recall investigation, General Motors Company (NYSE:GM) shares fell ~9% over the last week (~$5.5bn in market cap). While recall headlines may linger, we think the market overreaction provides a good buying opportunity. While Toyota Motor Corporation (NYSE:TM) (TYO:7203) traded down ~22% in the month following the accelerator pedal recall, the impact on GM is far less severe as fewer models are impacted, no current models are impacted & the cause has been identified. Repair costs are small & litigation risk is limited; however the DOJ fine could be ~$1bn given the expected Toyota Motor Corporation (NYSE:TM) (TYO:7203) settlement & reporting delay at General Motors Company (NYSE:GM). The stock correction more that reflects the financial impact; therefore we reiterate our Buy.
DOJ criminal probe could potentially raise an otherwise modest recall cost
Replacing the ignition is a quick & cheap repair, assuming $50/vehicle in parts & labor and all 1.6m cars returned, it would cost <$100m. General Motors Company (NYSE:GM) is also offering loaner vehicles to affected customers (est. cost of ~$80m). Litigation risk is limited as GM is only liable for incidents that occurred after it emerged from bankruptcy. The biggest headwind is the possible DOJ criminal probe for violating the TREAD Act which imposes criminal penalties on OEMs that fail to report safety defects that subsequently result in death or injury. Toyota is still settling with the DOJ; media reports estimate Toyota may need to pay up to $1bn despite lack of evidence of a defect. Although the General Motors Company (NYSE:GM) recall is smaller, GM took 10 years to report the issues and therefore is likely subject to similar fines.
Reputational risk partially mitigated by product age and pre-bankruptcy timing
Importantly, the General Motors Company (NYSE:GM) recall does not impact any existing products. All the recalled products and several of the brands have been discontinued. We believe that bankruptcy already provided a reputational hit, which helps separate “new” GM from “old” GM’s product issues. As long as new management addresses the situation quickly and candidly, we see limited long term reputational risk.
Valuation: Maintain Buy rating; Lowering Px target to include possible fine
We are lowering our price target from $52 to $51 to reflect the inclusion of a possible $1bn DOJ fine. Our revised $51 price target reflects 4.5x 2014E EBITDA.