Investors hate the unknown and whether, and for how long, a downtime might hit the auto industry is a big deal. But a strike wouldn’t necessarily be that bad for auto stocks.
(Index: F) f
(General Motors) It was a miserable Thursday. Ford stock fell 4.5%, while General Motors stock fell 5.8% and
Standard & Poor’s 500
Dow Jones Industrial Average
They both finished slightly green.
There seem to be two issues responsible. The first is falling car prices. The Consumer Price Index report for July from the Bureau of Labor Statistics showed that the cost of new and used cars decreased from a year earlier. Lower car prices can translate to lower profit margins and profits for automakers.
And according to Citi analyst Itai Michaeli, strike fear is weighing on stocks as well. He may be right.
Detroit’s traditional Big Three — Ford, GM, and
(STLA), Chrysler’s parent — is in contract negotiations with the UAW over a deal that would replace one that expires in September. The initial order from the UAW will add about $80 billion in cumulative costs for the three companies over four years — a large number that suggests wages will rise faster than inflation.
That might worry investors, but it’s only the union’s initial position. Context matters, too: The three auto companies are huge, spending nearly $450 billion annually to manufacture and sell about 13 million cars. However, if Detroit’s costs rose faster than those of its competitors, it would likely upset the competitive equilibrium of the industry and undermine profit margins.
This is why a strike can indeed be good news. It’ll be out for a few weeks, but it also showed that the three automakers don’t give in to all of the UAW’s demands. Another point is that a strike would reduce the supply of cars and keep prices higher for a longer period.
Bank of America Securities analyst John Murphy wrote in early July that volatility and weakness in automakers’ stocks stemming from employment concerns is an opportunity to add positions at a favorable point in the economic cycle. He said shares of General Motors and Ford could rise as interest rates stop increasing and sales of new cars increase.
Americans buy cars at a rate of about 15 million a year. Before the pandemic, that number was about 17 million.
Murphy has buy ratings on General Motors and Ford. GM’s stock price target is $72 a share, up more than 100% from $34.16 recently. He has a $22 target on Ford, up about 80% from $12.16 recently.
Michaeli is evaluating buying Ford stock and has a price target of $16 per share. He evaluates buying GM stock and has a price target of $89 for this stock.
UAW talks won’t be easy and wages will go up. But a deal that achieves a fair balance of workers and does not harm the competitive position of companies is possible.
If investors see the deal as reasonable, that would put the 2023 negotiations in the rearview mirror and open the way for stocks to recover.
Write to Al Root at email@example.com