General Motors Revs Its Engine: Investors Should Hop On For The Ride

After several negative pieces on General Motors (NYSE:GM), the firm finally announced its agreement to pay a $900 million fine in a deal struck with the U.S. Justice Department that essentially allows the auto maker to avoid criminal prosecution for the faulty ignition switch that caused the deaths of at least 124 individuals.

The faulty ignition-switches can spontaneously move out of the run position, which results in shutting off the engine despite being in motion. Although the U.S. Attorney's office has evidence that employees of GM's engineering and legal departments concealed the issue for close to 10 years, the Justice Department declined to charge any individuals with this deal. Justice officials noted that the investigation will continue.

Concurrent with the announcement, GM also noted that it will cost $575 million to settle most of the pending civil lawsuits filed against the company over the ignition switch.

In addition to the fine, GM agreed to independent monitors who will oversee the company's safety policies. Furthermore, the Justice Department agreed to drop two additional charges against GM: scheming to conceal material from government investigators and wire fraud. GM must cooperate fully with regulators for three years, and Justice reserved the right to bring those criminal charges if the company fails to comply.

Another element of the deal includes GM agreeing to a statement of facts that includes explicit language regarding the company's repeated and intentional failure to address the ignition switch problems.

The Dust Settles

In total, GM has now spent over $5.3 billion in fines and reparations; however, the silver lining to this settlement is that GM can finally move past the problems and focus on business again.

GM CEO Mary Barra met with several hundred employees on September 17, where she apologized to the crash victims. She also acknowledged the role that the legal and public relations disaster played as "a catalyst for meaningful change" for the whole firm.

With the settlement agreement in place, Ms. Barra and her team is convincing consumers and investors that the changes are genuine, and GM has fully addressed the managerial and engineering deficiencies.

Impact on Share Price

Shares in GM remained relatively unchanged in price after the announcement on Thursday as investors sifted through the specifics of the criminal settlement, which will include a $1.475 billion charge in the third quarter.

Still, stock in GM currently trades lower than the IPO price of $33 in November 2010, despite Ms. Barra's assurances to investors $10 billion in stock buybacks and cash executed through the end of 2016. Year-to-date, shares have declined in price by 15 percent.

 

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(Nasdaq.com)

Conclusion For Investors: Buy GM Now

While Ms. Barra may face continue to face mounting pressure, along with the prospect that Fiat Chrysler Automobiles NV (NYSE:FCAU) may continue to aggressively promote the idea of a merger between the two companies, GM is showing strong signs of recovery. Management at GM noted to employees on Thursday that the company plans for launching new automobiles equipped with advanced technology.

GM's net income overshadows several of its auto rivals and stock price sits at a reasonable multiple, compared with earnings.

(SOURCE: Yahoo! Finance)

Included in record earnings last quarter was the news that GM reaffirmed its positive outlook for greater EBIT-adjusted margins.

We are looking forward to a smooth ride up from GM's cheap current price.