How Much Trouble Is GM Really In?

The company’s never-ending recall story has to have an impact on sales. Thursday, Standard & Poor’s said it is likely that GM’s credit rating won’t be reviewed for possible upgrade to investment grade until 2015. And not because the recalls are so damaging to the company’s bottom line, but because of the damage the recalls are doing to the company’s “standing in the U.S. auto market.”

The only thing that’s saving GM’s sales now is the fact that every other automaker is also recalling cars at what must be a record pace. Ford Motor Co. (NYSE: F) recalled more than 400,000 cars and SUVs earlier this month, and Toyota Motor Corp. (NYSE: TM) called in more than 6 million after paying $1.2 billion to the U.S. Treasury to settle claims in another recall case. BMW recalled half a million cars Thursday after China forced its hand, and Volkswagen has stopped sales of some new models due to a potential fire hazard. Honda Motor Co. Ltd. (NYSE: HMC) has recalled some 900,000 minivans.

It did not help GM’s case Friday that new CEO Mary Barra, who has been trying to soothe Congress, customers, and shareholders, was revealed to have received an email about a power steering issue with the Saturn Ion in 2011. GM did not recall 1.5 million cars with this steering issue until late last month.

This does not burnish Barra’s image as a new broom sweeping out the Augean stable of GM. It doesn’t matter that nothing in the released email contradicts anything she’s been saying about the even more massive ignition switch issue. This is about image, and Barra has just been shown to have looked the other way before.

In an environment where everybody’s doing it, GM’s recalls will continue to batter the company, and its standing in the market will take some bruises but no knockout blow. Unless sales fall completely apart, GM will generate enough cash to pay its bills and its fines, and maybe even supply rental cars to the 2.5 million owners of the cars with the faulty ignition switches. The company has already said that it will take a charge of $1.3 billion in the first quarter. Its adjusted (GM calls them “core”) earnings will be positive.

For GM shareholders, it’s all about valuation. How far and how fast will GM’s share price fall? For those not interested in trying to time the market, it’s probably time to bail out. For others, the low price on GM stock is a buying opportunity, and likely to become a better one over the next few weeks.

The stock closed at $31.93 on Friday, down $1.37 or 4.1% in a 52-week range of $28.75 to $41.85. Yes, you’re right if you think that the decline from the 52-week high is more than 20%. It’s 23.7%.