Tesla Is a Winner From the UAW Strike, but Not the Biggest. 2 Other Stocks to Watch.

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The Detroit-Three auto makers had a labor cost advantage over Tesla in recent years because of the prior UAW labor contract.

Emily Elconin/Bloomberg

The contentious labor negotiations between the United Auto Workers and the Detroit-Three auto makers will reverberate across the industry for years to come. Most obviously, a new deal with substantially higher labor costs for U.S. hourly workers threatens to put General Motors , Ford Motor , and Chrysler parent Stellantis behind competitors.

Tesla (ticker: TSLA)—a nonunion shop—is one winner from the UAW labor negotiations, according to Wedbush analyst Dan Ives. The electric-vehicle pioneer is already more profitable than Ford (F) and GM (GM) and about as profitable as Stellantis (STLA). All of the traditional auto makers’ profits come from traditional cars, and all three are still losing money from selling EVs.

Tesla doesn’t appear to be the biggest winner, though. The current strike will reset the domestic bar on costs, giving foreign auto makers the advantage. Tesla has faced higher labor costs and labor shortages since the Covid-19 pandemic began in 2020. The Detroit-Three auto makers had a labor cost advantage during that period because of the prior UAW labor contract.

The Tesla-Big Three dynamic is a little like what has happened at FedEx (FDX)—primarily a nonunion employer—and United Parcel Service (UPS)—where many workers are represented by the Teamsters. Early in the pandemic, Wall Street cited a labor cost advantage for UPS. Now FedEx’s big wage increases paid earlier in the pandemic are in the past, and UPS—like the Detroit Three—is facing cost headwinds after the Teamsters approved a new contract in August with annual wage increases in the 5% to 6% range. UPS’s total labor costs, however, will rise more slowly than that. New contracts typically have some productivity gains and wages don’t account for all worker compensation.

UPS and FedEx have to worry about each other’s cost structure very closely because they dominate the U.S. parcel shipping industry.

Wall Street typically doesn’t worry about long-term profit margin erosion from higher wages. Partly because the industry is insulated from foreign competition. There is also a Post Office effect. The USPS is also a significant player in parcel shipping, and it is forced to offer universal service at fixed rates for letter delivery. The mandate leaves the post office trying to make up some profitability in its parcel shipping business—that’s another tailwind to UPS and FedEx parcel pricing.

The car business isn’t insulated from foreign competition though, which means both Tesla and the Detroit-Three have to pay attention to foreign auto makers. The car market is also more fragmented than parcel shipping, making consistent price increases to offset cost inflation more difficult.

That’s why Toyota might be the bigger winner than even Tesla in a drawn-out labor dispute for Detroit. In addition to importing cars from overseas plants, Toyota and other foreign car makers have nonunion plants located in the southern U.S.

“Foreign OEMs from Toyota to VW and many others are clear benefits that could
gain market share over the coming months/years in the U.S. with a new pricing
structure from GM/Ford/Stellantis likely now on deck given rising UAW cost
intakes.” wrote Ives in a Thursday report.

OEM is industry jargon for original equipment manufacturer. It means auto maker.

Investors should pay attention to Toyota Motor (TM) and Volkswagen (VOW.Germany) just as much as Tesla.

Still, UAW wage gains shouldn’t be an existential issue for the companies, says Benchmark analyst Mike Ward. He says GM now has as many salaried scientists on its payroll as hourly workers.

Average total compensation for a UAW worker, including pension and healthcare, totals some $120,000 a year, according to the Federal Reserve. About half of that is wages. That makes the total UAW labor spending in the range of $20 billion a year.

Ultimately, wages are going up. If they go up faster than expected, it might add another $1 billion versus what Wall Street would like. That theoretically adds only a percentage point to the price of North American cars. It isn’t existentially bad, but cars are a thin-margin business: GM and Ford’s operating profit margins are below 10%.

Workers want to see their standard of living improve. Companies want to stay competitive.

It must be “a very frustrating quagmire situation as [GM CEO Mary] Barra and [Ford CEO Jim] Farley have done a great job transforming the stalwarts and ready for the EV transformation,” adds Ives. “Now the UAW [is] like a meteor in the eyes of the Street.”

A fair deal is still possible. Investors will just have to wait to see what happens.

Ford and GM shares are down about 19% and 15%, respectively since the end of June, when labor issues started to weigh on investor sentiment. The S&P 500 is down about 2% over the same span.

Stellantis stock is up about 10% over that period, but Stellantis is a more global operation than the other two and is based in Europe. It’s also a cheaper stock, trading for less than 4 times estimated 2024 earnings. GM and Ford shares trade for less than 5 times and 7 times, respectively.

Toyota stock is up about 16% since the end of June. Its shares trade for about 10 times estimated 2024 earnings.

Write to Al Root at [email protected]

EMEA Tribune is not involved in this news article, it is taken from our partners and or from the News Agencies. Copyright and Credit go to the News Agencies, email [email protected]

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