Labor Stoppage and its Impact on the Auto Industry

by Warren Seah

Investors in the auto industry are concerned about the possibility of a labor stoppage and its potential duration. This unknown factor creates uncertainty, which investors generally dislike. However, surprisingly, a strike may not necessarily be detrimental to car stocks.

The recent performance of Ford Motor (ticker: F) and General Motors (GM) stocks reflects this unease. On Thursday, Ford stock experienced a 4.5% drop, while GM shares fell by 5.8%. In contrast, the S&P 500 and Dow Jones Industrial Average managed to finish slightly in the green.

There are two primary factors contributing to this situation. Firstly, car prices have been declining. The Bureau of Labor Statistics’ July consumer price index report reveals a year-on-year decrease in the cost of new and used cars. Lower car prices can directly impact the profit margins and earnings of automakers.

Furthermore, Citi analyst Itay Michaeli believes that the fear of an impending strike is also weighing heavily on these stocks. This is a valid concern.

Currently, the traditional Detroit Big Three companies—Ford, GM, and Stellantis (STLA), Chrysler’s parent—are engaged in contract negotiations with the UAW (United Auto Workers) to replace the existing agreement which expires in September. The UAW’s initial request involves adding approximately $80 billion in cumulative costs over four years for the three companies. This number suggests that wages would increase at a faster rate than inflation.

While this may cause apprehension among investors, it is critical to consider the broader context. These three car companies are massive entities, collectively spending around $450 billion annually to produce and sell about 13 million vehicles. Nevertheless, if Detroit’s costs rise more rapidly compared to its competitors, it could disrupt the industry’s competitive balance and erode profit margins.

Overall, the possibility of a labor stoppage and its consequences remain a major concern for investors in the auto industry. The impact on car stocks will depend on various factors and the subsequent competitive landscape. As the negotiations progress, the industry will closely monitor the outcome and adjust accordingly.

Why a Strike Could Be Positive for Automakers

A possible strike by the United Auto Workers (UAW) could actually have a silver lining for the three major automakers. While it may cause disruption for a few weeks, it would also send a clear message that the automakers are not willing to concede to all of the UAW’s demands. Additionally, a strike would effectively reduce the supply of cars, leading to higher prices that could be sustained for a longer period.

According to BofA Securities analyst John Murphy, the recent volatility and weakness in automaker stocks due to labor concerns presents an opportunity for investors. Murphy believes that as interest rates stabilize and new car sales increase, the stocks of companies like GM and Ford have the potential to rise.

Before the pandemic, Americans were purchasing cars at a rate of approximately 17 million per year. This number has since dropped to around 15 million. However, Murphy remains optimistic about the future prospects of GM and Ford, giving them both buy ratings. He sets a target price of $72 per share for GM, a significant increase from its recent price of $34.16. For Ford, he sets a target price of $22, which represents an 80% increase from its recent price of $12.16.

Another analyst, Adam Michaeli, also rates Ford and GM shares as buy. He has set a price target of $16 for Ford and $89 for GM.

Negotiations with the UAW are expected to be challenging, and there will likely be an increase in wages. However, it is possible to reach a deal that strikes a fair balance for workers without negatively impacting the competitive position of the companies.

If investors perceive the deal as reasonable, it would provide a positive outlook for future negotiations in 2023 and pave the way for a recovery in the stocks.

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