Strike Fear Is a Reason to Buy Ford, GM Stocks, Not Sell Them

Two issues seem to be responsible. First is falling car prices. The July consumer price index report from the Bureau of Labor Statistics showed that the cost of new and used cars fell from a year earlier. Lower car prices can translate into lower profit margins and earnings for automakers.

According to Citi analyst Itay Michaeli, fear of a strike is weighing on the stocks too. He is probably right.

The traditional Detroit Big Three companies—Ford, GM, and

Stellantis

(STLA), Chrysler’s parent—-are in contract negotiations with the UAW over a deal that would replace one that expires in September. The initial ask from the UAW would add roughly $80 billion in cumulative costs for the three companies over four years—a big number that implies wages would rise faster than inflation.

That might unnerve investors, but it is only the union’s initial position. The context matters, too: The three car companies are huge, spending roughly $450 billion a year to make and sell some 13 million vehicles. Still, if Detroit’s costs rise faster than those of its rivals, that likely would upset the industry’s competitive balance and eat into profit margins.

That is why a strike could actually be good news. It would be disruptive for a few weeks, but also show the three automakers aren’t giving in to all of the UAW’s demands. Another point is that a strike would lower the supply of cars and keep prices higher for longer.

BofA Securities analyst John Murphy wrote in early July that volatility and weakness in automaker stocks resulting from labor fears is an opportunity to add to positions at a favorable point in the economic cycle. He said shares of GM and Ford can rise as interest rates stop increasing and new car sales pick up.

Americans are buying cars at a rate of about 15 million a year. Before the pandemic, that number was about 17 million.

Murphy has Buy ratings on GM and Ford. His GM stock price target is $72 a share, up more than 100% from a recent $34.16. He has a $22 target on Ford, up about 80% from a recent $12.16.

Michaeli rates Ford shares Buy and has a $16 price target for the stock. He rates GM shares Buy and has an $89 price target for that stock.

The UAW talks won’t be easy and wages will go up. But a deal that strikes a balance that is fair for workers and doesn’t harm the companies’ competitive position is possible.

If investors see the deal as reasonable, that would put the 2023 negotiations in the rearview mirror and open the way for the stocks to recover.

Write to Al Root at [email protected]