Recalls Affect General Motors (NYSE:GM)’s Shares

General Motors (NYSE:GM)’s earnings for the second quarter were greatly affected by their recall of ignition-switch. Meanwhile, Ford Motor Co. (NYSE:F) achieved profits of 6%. General Motors (NYSE:GM) had to recall about 2.6 million automotives because of a defect in ignition switch. These included Chevrolet Cobalt as well. The defected ignition switch resulted in at least thirteen deaths. General Motors (NYSE:GM) gave the responsibility of administering a fund for the victims to Kenneth Feinberg. Today, Mr. Feinberg revealed his program in detail.

On Thursday, General Motors (NYSE:GM) recorded that they had to pay about $400 through compensation fund. They also paid a fine to the National Highway Traffic Safety Administration worth %35 million. This issue was brought to the company employees about a decade ago. However, General Motors (NYSE:GM) only recalled the defected vehicles in the beginning of this year. The issue is also being investigated by the Department of Justice.

After recalling the vehicles with defected ignition-switch, the company, General Motors (NYSE:GM), began an overall safety review of its whole portfolio. As a result, a few more millions of vehicles were called back due to ignition-switch related problems. For the recalls that were announced in the first and second quarters of this year, the company spent $2.5 billion for repairs. However, surprisingly enough, car buyers are still buying from General Motors (NYSE:GM) at the same rate. The last quarter earnings reported that General Motors (NYSE:GM) increased by 0.9% in the U.S. market. The share in North American Market went down to 17.2%, from 17.3% in the previous year and up from 16.5% of the previous quarter.

Among the customers who owned the recalled models, about 6600 went ahead and bought new models from General Motors (NYSE:GM). These customers were offered employee pricing by the company. Efram Levy, analyst at S&P Capital IQ pointed out that the new products will increase the company’s earnings in the next year and is positive about the company in general.

The total revenue generated in the second quarter increased by 1.3% to $39.6 billion. This was lower than the estimates by Wall Street – $40.59 billion. The company’s profit fell to $190 million – 11 cents per share. This was much lower than its earning in the same quarter over the previous year which was $1.2 billion – EPS of 75 cents. If the one-time items are removed from the earnings, the overall earnings were 58 cents for each share. General Motors (NYSE:GM) traded its shares at $36.15, which was 3.4% lower. By the end of Wednesday, the share price reduced by 11.6%.

The one-time items in the earnings included the compensation fund program of Feinberg and a write-down of $874 million for potential recalls in future. The company will log the future expenses as new cars are sold instead of accounting for all the recalls now. According to the company, the compensation costs are due to be increased by another $200 million. The $400 million charge estimate was the best estimate that the company has made for paying the claimants.