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A Cheap GM Stock Doesn't Mean a Good Value

Stocks in this article: GM TM

NEW YORK (TheStreet) -- Investors continue to harp that General Motors (GM) trades at a compelling valuation, despite the brutal recall issues for the automaker.

But given the situation and with the potential hit to its bottom line, I don't think the stock is cheap. Furthermore, it doesn't seem as though there will be any positive catalysts in the next one or two months.

The stock closed Wednesday at $34.88, down 14.7% year to date. It trades at 14.7 times last year's earnings.

The company has expanded its recall, and according to reports, the Department of Justice may press criminal charges against GM for failing to disclose a defect with its ignition switches.

GM now estimates it will take a $750 million charge for the first quarter, while the number of recalls has climbed to 6.3 million vehicles, 2.6 million of which are ignition switch related. 

Now that the company's dirty laundry is coming public, the best course of action is surely to play an open hand and be as transparent as possible. The last thing CEO Mary Barra wants or needs is a scandal to start off her tenure as the leader of GM. 

For now, I can't find a reason to love the stock at its current levels. When the news first broke of the investigations by the U.S. Attorney General and National Highway Traffic Safety Administration, it seemed as though everyone called the stock a buy. But there needs to be another reason to buy the stock. 

And I don't think the stock has fallen enough yet, given the potential ramifications of the recalls. The stock is down only some two-odd percent over the last several weeks, despite federal investigations, additional recalls and the increased cost to fix the problems.

Reportedly, the company has admitted that 13 deaths were linked to ignition switch flaws. According to U.S. safety regulators, however, the number may be more than 300 deaths. 

If that's the case, which we'll eventually know, then look out. 

The $750 million recall cost will cut severely into quarterly profits, considering the company took home $3.8 billion in profits in all of 2013, on revenue of $155 billion.

If the DOJ does press criminal charges, GM could face a 10-figure fine. Toyota Motors (TM) recently agreed to pay a $1.2 billion settlement to the Justice Department in an investigation that is similar to the GM probe. 

A possible settlement of 1% to 2% of revenue may seem insignificant. But a fine of this magnitude, coupled with a $750 million charge, would put a severe damper on annual profits for the automaker. 

Beyond that, the company could be obligated to pay victims compensation for their vehicles and likely the deaths, (if there are truly many hundreds of deaths linked to this issue).

Technically "old GM" -- the company that filed bankruptcy in 2009 -- would be the responsible party to cover the compensation. Although old GM no longer exists, which means the victims wouldn't have to be compensated, it doesn't mean that "new GM" will take a free pass. 

Although Barra has yet to announce whether GM will initiate a compensation fund, a decision will reportedly come within 30 to 60 days. Another potential negative catalyst. 

There's also a lawsuit filed in Corpus Christi, Texas, by a group of lawyers, to the tune of $6 billion to $10 billion over customer compensation. 

All I can see is more bad news during the next 30 to 60 days. More recalls, more lawsuits and large fines. There are no positive catalysts.

Ten years from now, this won't matter for investors. But this recall scandal can, and likely will cost the company billions of dollars -- even without compensating consumers. 

Remember, valuation is rarely a catalyst on its own and a cheap stock can always get cheaper. I'm a buyer of the stock between $30 to $32. 

At the time of publication, Kenwell didn't own any shares of the companies mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Bret Kenwell currently writes, blogs and also contributes to Robert Weinstein's Weekly Options Newsletter. Focuses on short-to-intermediate-term trading opportunities that can be exposed via options. He prefers to use debit trades on momentum setups and credit trades on support/resistance setups. He also focuses on building long-term wealth by searching for consistent, quality dividend paying companies and long-term growth companies. He considers himself the surfer, not the wave, in relation to the market and himself. He has no allegiance to either the bull side or the bear side.

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