Labor negotiations between U.S. auto makers and the United Auto Workers (UAW) are set to begin this week, creating uncertainty for investors. Understanding the impact of these negotiations, new deals, and potential work stoppages is crucial. Here’s a comprehensive guide to the upcoming talks, along with some important context.

Lead Company Speculation

Typically, the UAW selects one company to negotiate with and uses that deal as the basis for agreements with other auto makers, but this time may be different. While unconfirmed, Wall Street believes Stellantis could lead the negotiations.

Contract Expiration and Start of Negotiations

Negotiations are commencing as the current contract expires in mid-September.

The Main Issue: Inflation

The primary concern during these negotiations is inflation. In 2019, when the UAW last negotiated with auto makers, U.S. consumer-price inflation averaged around 2% per year. As a result, wages for the 2019 contract increased by approximately 2% to 3%. However, the current inflation rate is much higher, indicating that wages in the new contract will likely grow at a faster pace. According to Evercore ISI, year one could see an increase of up to 10%, with Wells Fargo estimating a potential overall rise of 30% over the four-year term.

Recent Labor Deal Example

Spirit AeroSystems, a supplier for Boeing, recently faced a labor stoppage with the Machinists’ union. However, after a few days, both parties reached an agreement on a new four-year deal. Wages will increase by approximately 25% to 30% over this period. Although aerospace and automotive industries are unrelated, this example sheds light on recent labor negotiations.

Possibility of Auto Strikes

According to Evercore ISI analyst Doug Dutton, there is a 50/50 chance of an auto strike occurring this time. This slightly higher likelihood may stem from wage uncertainty and the industry’s transitional phase towards electric vehicles. Additionally, the UAW recently elected a new president, Shaun Fain, who emphasized the need to be prepared for the challenges ahead in his inaugural speech.

Stay informed as the negotiations unfold, as they will have significant implications for both investors and the auto industry as a whole.

Does a Strike Matter?

In the grand scheme of things, strikes don’t have a lasting impact. It’s no surprise that labor costs increase as a result.

However, these higher costs can put pressure on earnings. According to Wells Fargo analyst Colin Langan, Ford could potentially face an annual increase of about $850 million due to these costs.

While most shares of auto makers and suppliers experienced gains in 2019, they did underperform in the second half of the year compared to the overall market.

Determining the exact cause of this underperformance is difficult, but labor certainly played a role. As we enter the new year, it remains to be seen whether history will repeat itself or take a different course. Movements in auto-related stocks will depend on a variety of factors such as interest rates, car prices, the health of the U.S. economy, and the impacts of the new labor deal.

What Does Wall Street Think?

According to BofA analyst John Murphy, the strike represents both a risk and an opportunity. This sentiment resonates with Wall Street as a whole. Murphy believes that stocks won’t overreact to labor news, but if they do, the direction will likely be downward. In such a scenario, Murphy views it as an ideal buying opportunity.

When it comes to GM and Ford stocks, GM is more popular among analysts. Around 56% of analysts covering GM rate its shares as Buy, whereas the average Buy-rating ratio for stocks in the S&P 500 is approximately 55%. On the other hand, Ford has an average Buy-rating ratio of about 39%.

As for suppliers like Aptiv (APTV), BorgWarner (BWA), Magna International (MGA), and Lear (LEA), their Buy-rating ratios stand at approximately 77%, 65%, 53%, and 44% respectively.

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