The 7 Most Famous Product Recalls: How Did Stock Prices React?By Shauna O'Brien | Published July 24th, 2014
In the first half of 2014, General Motors (GM) recalled nearly 25 million vehicles of 53 different models in the United States. On average, the company announced a recall every 7 days, flooding the media with its numerous announcements. Below are seven other big-name companies that have been faced with a major product recall.
1. Johnson & Johnson (Tylenol, 1982)
In September, 1982 Johnson & Johnson (JNJ) recalled all of its Tylenol products after 13 people died after taking pills that were purchased in the Chicago area. It was concluded that an individual had entered retail stores and tampered with the bottles – adding potassium cyanide. This incident prompted a reform for packaging of over-the-counter drug products. JNJ’s stock price plummeted after the incident, but was able to recover within a month. The company was applauded for its action in handling the tragedy.
2. Merck (Vioxx)
Vioxx was a drug that treated arthritis that was manufactured by Merck (MRK) and approved by the FDA in 1999. In 2004, after receiving results from a clinical trial that the drug increased the risk of heart attacks, MRK recalled Vioxx. Merck has spent approximately $4.85 billion to settle 27,000 lawsuits related to heart attacks and stoke incidents. MRK’s share price collapsed on the news, taking over a year to recover.
3. Pfizer (Valdecoxib)
Pfizer’s (PFE) arthritis treatment Valdecoxib was removed from shelves due to heart attack and stroke concerns related to Merck’s massive Vioxx recall. The recall resulted in $1.8 billion in legal charges for PFE. In addition to its general legal fees, PFE was also subject to one of the largest criminal fines in U.S. history. Despite the recall, PFE’s share price did not see any long term decline.
4. Dell (Batteries)
In August 2006, Dell (DELL) recalled 4.1 million lithium-ion batteries that were made by Sony (SNE). The recall was prompted by several reports of laptop fires caused by the batteries. This recall was one of the largest safety recalls for electronics in history. Dell’s share price dipped on the reports, but quickly recovered.
5. Hasbro (Easy Bake Oven)
In July 2007, Hasbro (HAS) pulled one million Easy Bake Oven’s off shelves due to several reports of young children being badly burnt from the toy. This recall was the second recall for the product in 2007, with 249 reports of dangerous situations involving children. Hasbro’s share price sunk on the news, and did not recover until the beginning of 2008.
6. Toyota Motors (Toyota Rav4, Corolla, Matrix, Avalon, Camry, Highlander, Tundra, Sequoia)
In January 2010, Toyota Motors (TM) began the year with a major decline in its stock price after the company recalled 2.3 vehicles due to several reports that the gas pedal had become stuck. This recall came after the company announced a 4.3 million vehicle recall for a similar issue.
7. Graco (High Chairs)
In March 2010, Graco (GGG) announced a recall of more than 1 million of its Harmony high chairs. The recall occurred after the company received hundreds of complaints that the high chairs were prone to tipping over. There were 24 reports of injured children. Despite the large recall, the company’s share price was not significantly affected by the news.
The Bottom Line
From the examples shown above, recalls can have a major effect on a company’s stock price, but a declined share price is not always the case. Although General Motors announced 21 recalls of 53 vehicle models in the first six months of 2014, its share price has shown no significant decline. For a long term investor investing in a strong company, a recall is not likely to cause permanent damage to a portfolio.