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GM's Proactive Recalls Are a 'Double-Edged Sword,' Analyst Says

DETROIT (TheStreet) -- GM (GM - Get Report) shares were falling Thursday after the automaker said it has recalled nearly 3 million more vehicles, bringing the year's global recall total to about 12.8 million vehicles.

Of the year's recalls, 11.2 million -- including 2.7 million announced Thursday -- are in the U.S.

In early afternoon trading, GM shares were down 77 cents to $34.17. Shares are down 16% year to date. The company said it would take a second-quarter charge of approximately $200 million from Thursday's recall. It took a first-quarter recall-related charge of $1.3 billion.

"It's encouraging to see General Motors being this proactive regarding vehicle safety concerns," said Kelley Blue Book analyst Karl Brauer, in a prepared statement. "Unfortunately, it's also a bit of a double-edged sword."

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Since she took over as CEO in January, Mary Barra has appointed a global safety chief and boosted the focus on vehicle defects: GM now five dozen safety investigators on staff, seeking out safety issues.

"The automaker is in this transitional period where all these new safety resources are rapidly identifying a large number of defects," Brauer said. "In the near term, we'll likely see a higher rate of recalls as the company aligns its internal process to a new standard of safety oversight."

Financial analysts have continued to maintain that GM shares have been sold off too quickly. April sales figures seemed to buttress their view that consumers have not been put off by the recalls. In April, GM's sales rose 7% and its retail sales rose 8%. Overall U.S. light-vehicle sales also rose 8%.

Following the recall announcement, S&P Capital IQ analyst Efraim Levy reiterated a strong buy on GM.

"Even with GM's new $200 million of recall-related expenses for the recall of an additional 2.7 million cars, we don't think the impact on GM's brand image is anywhere near a tipping point that would trigger a customer exodus from its vehicles," Levy wrote in a note.

"On the contrary, we think GM quality and design has improved, but that renewed industry proactiveness for recalls (that can impact on a global scale) and GM's focus on and issues discovered while investigating its ignition problem is triggering the new recalls," Levy said.

Thursday's recalls address five different safety problems. Most prominent is a tail lamp malfunction, caused by corrosion, which can disable cruise control, traction control, electronic stability control and a panic braking assist feature in 2.4 million U.S.-market, previous generation passenger cars including 2004-2012 Chevrolet Malibu's. Also, 140,067 Chevrolet Malibu's from the 2014 model year have hydraulic brake booster malfunctions.

Earlier recalls included 2.6 million vehicles in which ignition switch defects have been linked to 13 deaths and 32 crashes.

-- Written by Ted Reed in Charlotte, N.C.

To contact this writer, click here.

Follow @tedreednc




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