Last month was the auto industry’s best May since 2007 with a 6.7 percent rise in new sales to 1.54 million, putting the industry’s seasonally adjusted annual rate over 16 million units. Surprisingly, despite 2.6 million recalls to start the year, General Motors outperformed peers like Ford Motor Company with a 12.6 percent increase in monthly sales. Some analysts attributed the performance to pent up demand, and now foresee increased demand for the latter part of the year. However, should you be so bullish?
In the month of May, GM’s 12.6 percent increase in sales significantly outpaced Ford’s 3 percent growth. Prior to May, General Motors’ U.S. auto sales had actually fallen 2.3 percent versus an industry that saw a 1.5 percent increase. As most would expect, GM’s weakness in the first four months was seen as an effect of its ongoing recall drama. While Ford’s recall volume has been significant as well, it’s not near what we’ve seen with GM, and its sales have naturally been better.
With that said, after 2.6 million vehicles recalled in the U.S., and a strong May, investors thought that GM could finally move forward. However, June has been a busy month for General Motors, including six recalls totaling more than three million units worldwide. In total, GM has issued 44 recalls covering 20 million vehicles globally, with potentially more on the way.
The potential civil and criminal fallout from General Motors’ 2014 recall madness is mindboggling to ponder, yet the consumer backlash could be even more significant, which has been the investor’s worst fear. Moreover, Cars.com recently announced that seasonally adjusted annualized new car sales were 16.1 million and that General Motors’ recent sales have been unimpressive, thus causing its market share to fall 1.3 percent. This shows that despite a big month in May consumers are being affected by the continuous headlines and negative publicity of recalls with General Motors. This is a company that just recently became free of the government’s bailout stake, and prior to 2014 investors were looking ahead to a big year of aggressive buyback programs and a high dividend to match that of Ford.
Unfortunately, these potential catalysts have taken a backseat, and will likely persist as General Motors continues to recall more vehicles and top executives stay on the docket in Capital Hill and in meetings with lawyers. Meanwhile, Ford and other top automotive peers continue to innovate, release new vehicles, and are focusing its energy where it needs to be.
In an industry that has been a true bright spot within the economy, auto stocks is an area where investors can’t ignore. But in this particular case, GM is not the best place, as it could get worse before getting better, with all signs pointing to May being an exception rather than a rule for the company.