Morningstar

Supreme Court Ruling Is a Setback for GM

Ruling means automaker can be sued over faulty ignitions, but we kept a high reserve in place to account for legal risk such as this.

Securities In This Article
General Motors Co
(GM)

We are not changing our

certiorari from December 2016. GM wanted the court to hear its appeal of a July 2016 Second Circuit U.S. Court of Appeals decision in which a panel overturned an April 2015 bankruptcy court ruling on New GM’s liability for economic loss and personal injury for vehicles made by Old GM but recalled by New GM for faulty ignitions.

The most dollar significant aspect of the Supreme Court's decision to us is that since the appellate court’s ruling stands, New GM can be sued for economic loss for all the vehicles recalled in 2014 for faulty ignitions, even ones made by Old GM. Lead plaintiff firm, Hagens Berman, in an amended complaint in Sep 2016 puts the number of vehicles recalled for ignition defects in 2014 at over 13 million and in April 2015 Bloomberg quoted Steve Berman, managing partner, saying each owner could sue for $750, which totals $9.75 billion. Other media reports have placed the high end of damages at $10 billion based on court documents.

We expect GM will eventually settle the economic loss cases for an amount far less than $10 billion but we feel there’s too much uncertainty to confidently know the right number in advance. We remain skeptical that these vehicles, most of which are very old, are permanently impaired in value when the vehicle can be fixed for free. Still, we do not expect GM to win in court when it has admitted it knew of the defects but did not recall vehicles right away. That reason and the large uncertainty of the amount likely to be settled is why we have long reserved a conservative settlement amount of $7 billion.

This week’s denial by the Supreme Court does not change our reserve because we have kept a high reserve in place to account for legal risk such as the setback GM suffered on April 24. If our $7 billion reserve proves too low, a $10 billion GM payout would only reduce our fair value estimate by about $2.

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About the Author

David Whiston, CFA, CPA, CFE

Strategist
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David Whiston, CFA, CPA, CFE, is a strategist, AM Industrials, for Morningstar*. He covers stocks in the automotive industry, including dealerships, parts manufacturers, and automakers. He has covered the automotive industry since joining Morningstar in 2007. He writes stock reports, ad hoc reports, stock analyst notes, and builds discounted cash flow models for each company covered. He also assesses their economic moat and makes frequent television and print media appearances in local, national, and international news outlets. Key stocks covered include GM, Ford, CarMax, and all six publicly traded franchise auto dealers, such as AutoNation and Penske Automotive Group.

Before joining Morningstar in 2007, Whiston spent four years in PricewaterhouseCoopers’ New York real estate audit practice and one year in its Chicago office working on real estate acquisition due diligence, gaining experience around assessing an asset’s cash flow.

Whiston holds a bachelor’s degree in business administration with a concentration in accounting from the University of Richmond’s Robins School of Business. He also holds a master’s degree in business administration with concentrations in finance, economics, and organizational behavior from the University of Chicago Booth School of Business. He holds the Chartered Financial Analyst® designation, and he is a Certified Public Accountant and a Certified Fraud Examiner.

In 2012, he ranked first in the specialty retailers and services industry in The Wall Street Journal’s annual “Best on the Street” analysts survey. He ranked first in the same industry in 2011 .

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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