The United Auto Workers’ strike against the three auto makers with roots in Detroit starts the week with plenty of work ahead.
The companies, and the Union, are negotiating in public. Many numbers are getting thrown around. Following it all isn’t easy but understanding where negotiations sit is important for determining if there is a coming opportunity for investors in auto maker stocks.
The 2023 UAW strike began on Friday with the Union striking select facilities and all three auto makers.
“Let’s be clear: if the Big Three decide to lay people off who aren’t on strike, that’s them trying to put the squeeze on our members to settle for less,” said UAW President Shawn Fain in an emailed statement. “With their record profits, they don’t have to lay off a single employee. In fact, they could double every auto worker’s pay, not raise car prices, and still rake in billions of dollars.”
General Motors (ticker:
GM
) and
Ford Motor
(F) don’t see it that way. The companies were forced to lay off strike-related employees because there was no work to be done with some parts of the manufacturing system taken out. The longer the strike goes on, the more likely it is to see other parts of the auto makers’ manufacturing networks go down to lack of supply.
The part about record profit, doubling pay, and stable car prices while making billions appears to go a little too far. Ford, GM, and
Stellantis
(STLA)) all posted very strong 2022 results, earning some $37 billion in North American operating profit, according to FactSet. Profitability in 2023 and coming years, however, is expected to fall as new car prices moderate from pandemic-induced records.
What’s more, operating profit margins for the Detroit-Three are averaging roughly 7% over an economic cycle. Margins at
Toyota Motor
(TM), which sells as many cars as GM in the U.S., average about 9%. Margins at
Tesla
(TSLA) have averaged about 13% since it started delivering one million-plus units a year.
If nothing else at the companies or in the industry changed, doubling UAW wages would theoretically eat away about 5% to 10% of total North American operating profits at the Detroit-Three and there would be billions left over.
UAW claims are one reason Stellantis, Ford, and to a lesser extent GM, have taken details of their offers directly to investors and UAW members, releasing details in the press. That could make it difficult for UAW leadership to declare victory if they agree to a company-published outline, but the companies have their reasons.
“It’s very important we deal with the facts,” Stellantis North American CEO Mark Stewart tells Barron’s. “We want to make sure everyone internally and externally understands that we’ve got a really competitive offer.” Stellantis believes its offer addresses inflation as well as keeping the company competitive amid rising competition from EV players such as Tesla.
The current Stellantis offer looks similar to the other two auto makers’ and includes wage increases of about 20% over the life of the contract. That still looks short of current union demands of between 30% and 40% but the two sides don’t always speak the same language.
The 20% from the auto makers excludes cost-of-living adjustments, or COLA. Including COLA bumps, wages might rise between 6% and 7% a year on average. That isn’t too far off the 7% to 8% ask implied by UAW numbers. What’s more, GM has offered a 10% bump in year one to account for recent inflation. The UAW didn’t immediately respond to a request for comment about how it views COLA wage increases in its offer.
When a deal is struck is still anyone’s guess, but the gap between the two sides is closing.
That spells opportunity for investors. Wall Street analysts including BofA Securities’ John Murphy and Morgan Stanley’s Adam Jonas believe auto maker stocks could recover after a deal is reached, or when one looks likely.
Shares of Ford and GM are both down about 16% over the past two months as labor negotiations heated up. The
S&P 500
is down about 1% over the same span. Stellantis stock is up about 3% over the past two months. Its shares have held up better than shares of the other two auto makers with roots in Detroit.
Stellantis stock is cheaper than shares of the other two, one reason it’s traded differently. Stellantis stock trades for about 3.2 times estimated 2024 earnings, down from about 3.6 times a few months ago. GM shares trade for about 4.7 times earnings, down from about 6.5 times a few months ago. Ford shares trade for about 6.1 times estimated 2024 earnings, down from about 8 times a few months ago.
Write to Al Root at [email protected]
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