The labor contract between the United Auto Workers and the Detroit-Three automakers expired at midnight on Thursday. A deal isn’t done and the union will not strike plants.
Investors will need to figure out what to do with car stocks. A lengthy work stoppage might also impact other sectors and overall economic growth in the U.S. during the final parts of 2023. Navigating it all, however, doesn’t have to be overwhelming. There will also be some stocks to buy in the aftermath of whatever happens.
Keep Things In Perspective
New UAW President Shawn Fain has a flare for the dramatic, literally trashing proposals from Ford Motor (F), General Motors (GM), and Chrysler parent Stellantis (STLA). It’s a little unnerving for investors.
What’s more, a strike will have wide-ranging impacts. Big numbers, mostly in the billions, will get thrown around daily but any strike will eventually get resolved and most of the economic activity, such as producing and buying new cars, will shift to different months on the calendar.
Cars are important for the economy, but consider the labor deal between United Parcel Service (UPS) and the Teamsters union impacted some 340,000 workers. Less than 150,000 workers are impacted by current negotiations. There are more than 160 million workers in the U.S.
Numbers, Numbers, Numbers
The number of total workers directly impacted by the strike is small. The total impact on the U.S. economy isn’t that large either.
The Anderson Economic Group estimated the cost to the U.S. economy of a UAW strike was about $500 million a day. A 10-day strike amounts to about 0.02% of total annual American economic output.
Anderson gives auto manufacturing an economic multiplier of about two times, which means that for every dollar not spent by workers because of the strike, it will have a $2 impact on the economy from lost wages, production, dealers sales, and buying a latte at Starbucks (SBUX). Investors can use that number and multiplier to keep track of impacts.
As for the car companies, GM, Ford, and Stellantis have about 40% share of the U.S. market for cars and light trucks. North American production output for the trio amounts to roughly $1 billion a day, excluding Sundays. UBS analyst Joseph Spak pointed out in a report this week that auto parts companies lost about 0.3% of full-year sales every 10 days of the strike.
That’s what’s at risk for the companies. For consumers, lower auto production means a lower supply of new vehicles and higher prices for new and used cars, as well as higher prices for auto insurance. Insurance rates are tied to the value of vehicles.
Insurers in the Crosshairs
J.P. Morgan analyst Jimmy Bhullar pointed out in a September report that higher auto prices are headwinds for insurers such as Allstate (ALL) and Progressive (PGR). The problem is insurance rates lag the rise in car prices, pressuring profit margins. Bhullar likes both stocks, raking them Buy, partly because profit margins are rebounding after the pandemic restricted auto production and drove up car prices. The rebound, however, will be delayed if there is a lengthy strike. Investors might want to just wait to see what happens before jumping into auto insurer shares.
Why Auto Part Stocks Can Shine
Shares of auto parts producers, which have also been weak in recent weeks could shine. Aptiv (APTV), BorgWarner (BWA), and Mobileye (MBLY) shares are down more than 10% on average over the past couple of months.
UBS analyst Joseph Spak has Buy ratings on all three stocks. That’s partly because of the recent decline and partly because all three have above-average growth on the horizon because of business tied to EVs and self-driving cars.
Why Ford and GM Could Bounce Back
GM, Ford, and Stellantis shares are down about 16% from their 52-week highs on average with most of that drop coming in the last two months while labor rhetoric heated up. The S&P 500 is flat over the past two months.
Now the strike is here and, eventually, it will be resolved. Many on Wall Street, including BofA Securities analyst John Murphy and Morgan Stanley analyst Adam Jonas point out that automaker stocks tend to rebound after a deal is done. That sounds like an opportunity.
It also sounds like a reason to avoid Toyota Motor (TM) shares for a little while. Shares are up about 18% over the past two months. Toyota might be a winner in a strike, but it’s a short-term winner.
Cars Stocks for the Long Run
A bad deal, however, might continue to weigh on Ford, GM, and Stellantis shares. Wedbush analyst Dan Ives tells Barron’s that annual wage increases of 5% could put GM, Ford, and Stellantis at a competitive disadvantage versus nonunion players including Rivian Automotive (RIVN) and Tesla (TSLA).
Auto workers and companies will both likely declare victory when a deal is done. Figuring out exactly how fast wages are rising is difficult. Auto deals tend to include wage increases and lump sum payments. Anything that implies a 4% annual increase is fine.
Inflation has averaged close to 4% over the life of the existing labor contract compared with 2% over the life of the prior contract. Production wages for the UAW in the 2019 contract were in the range of $32 a share, according to the Federal Reserve. Average hourly earnings in the U.S. are about $32.50, according to the Bureau of Labor Statistics.
Wages need to rise, but how much they rise could determine whether GM, Ford, and others will be able to effectively fight Tesla for an EV future.
Write to Al Root at [email protected]
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