MONEY stocks

Recalls Aren’t General Motors’ Only Problem

2014 Chevrolet Cruze
Strong sales for the fuel-efficient Chevy Cruze helped drive General Motors sales in May. courtesy of General Motors

GM's strong May sales show consumers are looking beyond the automaker's recent quality issues. Unfortunately, the company faces other challenges.

So much for the specter of recalls.

In May, car buyers in the U.S. largely ignored the bad news surrounding General Motors and flocked to GM dealerships. In a month in which the nation’s largest automaker announced yet another series of recalls — bringing GM’s total number of recalled vehicles this year to more than 11 million — the automaker reported its best monthly sales since the global financial crisis struck in 2008.

GM said it delivered 284,694 vehicles in the U.S. last month, marking a 13 percent rise from May 2013′s tally. The better-than-expected results were driven in large part by a strong month for GM’s Chevrolet division, where sales jumped 14%, led by strong demand for the Chevy Cruze, which appeals to younger buyers. As for Buick, GM’s more upscale line saw its best May results in nearly a decade.

Analysts had been expecting good results, but not this good. For instance, Edmunds.com, citing favorable credit conditions that were making it easier for consumers to buy and lease new cars, forecast that GM sales would reach nearly 270,000 in May.

This proved to be a good test for CEO Mary Barra. When General Motors named Barra the first female CEO of a major automaker late last year, the C-suite shift was supposed to herald “the new GM,” a reinvented titan with improving finances and better cars. Recently, though, it was another switch — a malfunctioning part in ignitions in some older-model vehicles — that dominated the headlines and kept reminding the public of the old GM.

Tuesday’s announcement indicates Barra & Co. have gotten consumers to look past the bad headlines.

But Barra faces other challenges:

The company is still losing market share.

Last year, GM’s share of total U.S. auto sales slipped to 16.9%, down from the 17.5% share it enjoyed in 2012. Meanwhile, rival Ford — which also had a good May, selling 254,084 vehicles, up 3% from a year ago — saw its share rise from 15.2% to 15.7%.

It’s not because GM isn’t trying.

As a result of its bankruptcy five years ago, GM shed some struggling brands, such as Hummer and Saturn. The move allowed GM to trim the number of platforms on which the company’s vehicles are built, and that in turn made it easier and cheaper to upgrade the firm’s entire line. Starting last year, GM redesigned 80% of its vehicles, resulting in cars and trucks that have “never been better in the history of the company,” says Kelley Blue Book senior analyst Karl Brauer.

Unfortunately, GM’s chief rival is about to go on an upgrade spree. Ford is set to launch the first aluminum-frame truck, which significantly improves fuel efficiency.

And critics say GM priced some newer models, such as the Cadillac ELR, too high to gain market share.

GM still lacks buzz.

There’s one area where GM is selling at a big discount: its stock.

F Chart

F data by YCharts

The company’s shares trade at a modest price/earnings ratio compared to its peers, and GM’s P/E ratio — unlike Ford’s — hasn’t really lifted recently.

GM PE Ratio (Forward) Chart

GM PE Ratio (Forward) data by YCharts

GM’s low valuation may seem appealing at first, but the stock’s P/E ratio has barely budged in the past year despite the company’s refreshed domestic vehicle lineup — a sign that investors may lack faith in the turnaround.

Right now, Europe is still emerging from recession. And while China offers opportunity, GM sales there pale in comparison to the domestic market. Barrack Yard Investors portfolio manager Marty LeClerc says that puts the onus for General Motors’ success squarely on the company’s new U.S. line.

If today’s numbers are any indication, investors can feel hopeful the U.S. line is making waves. Unless Ford’s upcoming new truck has consumers thinking GM is old again.

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser