The automotive industry has been navigating a tumultuous period, surrounded by a still high inflation and rising interest rates. Although a resurgence in electric vehicle demand has provided a fleeting respite, residual tension is palpable due to potential strikes led by the United Auto Workers (UAW) union at Stellantis (STLA), Ford Motor Company (F), and General Motors (GM).
The UAW, representing 46,000 GM workers, 57,000 Ford employees, and 43,000 STLA workers, initiated negotiations with the auto giants in July. Historically, the UAW would choose one from these Detroit Three to lead the talks, using it as a blueprint for the remaining deals. However, this time, union President Shawn Fain has opted to negotiate with all three simultaneously after reporting no significant progress with Ford and GM.
About 25,000 UAW members associated with the Detroit Three, representing about 17% of the total membership, are striking at 43 facilities across 21 states. In Michigan alone, two automotive plants – each owned by GM and Ford – and 13 parts distribution centers are impacted, affecting over 9,000 UAW members.
A pivotal demand for the UAW is the elimination of the two-tier wage system, which sees new hires earning significantly less than the veterans. The union is expected to advocate for the reinstatement of pay raises tied to living costs and retirement benefits reduced during the 2008-2009 financial crisis.
Armed with the awareness of automakers' recent financial success and considering substantial executive compensation and sizeable federal subsidies for EV sales, the UAW is pressing for notable salary increases. It also demands the restoration of defined benefit pensions for all workers, reducing the work week to 32 hours, ensuring job security, and ending the use of temporary workers.
Despite challenging negotiations, STLA has proffered a significant offer to the union. Further, talks with Ford are advancing, outlining agreeable terms on wages and benefits.
Impacts of the Strike
On the Detroit Three
As the UAW strike enters its third week, broadening its scope to encompass Ford and GM, an ominous cloud looms over the U.S. automobile industry. Industry experts have expressed concerns, cautioning that these actions could potentially fast-track these corporations toward bankruptcy.
According to prior estimates by Deutsche Bank, a comprehensive strike impacting all car manufacturers could result in losses between $400 million to $500 million per week, assuming all production is stalled. While some losses may be offset with increased production rates once the strike concludes, this option becomes less likely if the labor dispute prolongs for weeks or months.
In fiscal 2019, GM's fourth-quarter earnings suffered significantly due to the 40-day UAW strike, with profits plunging by $3.6 billion. Morgan Stanley analyst Adam Jonas assessed that one month of total production loss could equal between $7 billion and $8 billion in forfeited profits across all three auto giants.
While the ongoing strike has largely impacted Detroit automakers, its effect on GM’s third-quarter new vehicle sales in the U.S. was limited. GM reported a promising 21.4% surge in sales from July through September, outpacing industry anticipations of a 15% to 16% increase. Sales across all of GM’s brands experienced a year-over-year growth.
However, STLA witnessed a 1.3% downfall in sales during the third quarter, an outcome more likely linked to its pricing strategy than the UAW labor dispute.
Although the impact of work stoppages has not yet affected GM and other firms, potential supply chain disruptions and sales complications may arise if the strike extends or amplifies. The dispute's ramifications could grow significantly in October, particularly concerning specific models such as the Chevrolet Colorado and GMC Canyon midsize pickups that have already witnessed production reduction.
The prevailing strike could taint the reputation of the auto behemoths, leading to customer dissatisfaction due to potential delays, cancellations, or quality issues resulting from the strike.
Furthermore, strike-induced increased production costs could dampen profits for these car manufacturers, forcing them to offer higher wages and benefits to UAW employees. This could adversely affect their financial standing, limiting their capacity to invest in new technologies, products, and markets.
Job Loss
The economic impact so far has been relatively subdued compared to preliminary expectations before the UAW's unexpected strategy of targeting specific plants. It is essential to recognize the increasing job losses, coupled with layoffs in ancillary automotive suppliers, which are expected to intensify in the upcoming days.
F’s additional 330 layoffs at the Chicago stamping plant and the Lima engine plant amid the ongoing strike brought the laid-off workers to 930.
According to predictions by the University of Michigan economist Don Grimes, Michigan is projected to see up to 18,495 job cuts by the end of the week, including layoffs in auto suppliers, and are a direct consequence of the escalating strike tactics deployed by the UAW. Nationwide, potential job losses are predicted to reach up to 65,640 this week.
However, these job losses could have been significantly higher if the UAW had followed the conventional approach of targeting all operations of a single automaker when contract negotiations reached an impasse.
On the Economy
As per the University of Michigan economist Don Grimes, the UAW strike timing is especially troublesome for economic growth overall, given that October typically heralds the beginning of student loan repayments following a pause that had lasted for over three years, shrinking consumer savings due to depleted emergency funds accumulated during the pandemic and the rising interest rates that are expected to beset overall growth.
Moody's economist, Mark Zandi, said, "If the UAW strike lasts through the end of October as we anticipate, it will reduce annualized real GDP growth in the fourth quarter by another estimated 0.3 percentage point."
This estimate considers the direct impact of stalled car and parts manufacturing potential downstream effects on suppliers and auto dealers, coupled with decreased spending due to wage losses incurred by workers participating in the strike. With the collective weight of these adverse factors, the U.S. economy could head into a challenging fourth quarter.
On Competitors
As the strike impacts the Detroit Three, industry players Toyota Motor Corporation (TM), Mercedes-Benz Group AG (MBGAF), and AB Volvo (publ) (VLVLY) could significantly benefit from the chaos.
These automotive titans, having unions such as Germany's IG Metall, Sweden's IF Metall and Unionen, and Japan's Toyota Motor Workers’ Union, have a limited presence in UAW.
Such companies stand to service customers seeking alternatives to products from the Detroit Three. By continuing to deliver reliable and high-quality vehicles, its strong suit being luxury sedans, SUVs, and EVs, these automakers could further enhance their reputations and customer loyalty.
Additionally, these corporations could utilize their global footprint and remarkable efficiency to sustain a competitive edge and maintain a leadership position in innovation.
Auto industry powerhouses TM, MBGAF, and VLVLY have also invested substantially in pioneering technologies such as electrification, autonomous driving, and connectivity.
Contemplating the advantage these three car manufacturers currently hold over the Detroit Three amid unresolved worker strikes, it seems prudent to examine the other elements making their stocks an attractive investment endeavor now:
Toyota Motor Corporation (TM)
Based in Toyota, Japan, TM, with a market cap of over $229 billion, manufactures and sells passenger, minivans, commercial vehicles, and related parts and accessories globally.
It pays an annual dividend of $4.99 per share, translating to a dividend yield of 2.55%. Its four-year average yield is 2.81%. Its dividend payouts grew at a CAGR of 1.6% over the past three years and 1.3% over the past five years.
TM’s trailing-12-month EBIT and EBITDA of 8.33% and 12.62% are 13.2% and 14.3% higher than the industry averages of 7.36% and 11.04%, respectively. Its trailing-12-month cash from operations of $24.60 billion is significantly higher than the industry average of $223.80 million.
In terms of forward P/E, TM is trading at 9.12x, 36.1% lower than the industry average of 14.28x. Its forward Price/Cash Flow multiple of 5.28 is 26.7% lower than the industry average of 7.95.
TM’s global sales report for August 2023 notched an impressive 9% year-over-year growth to 923,180 vehicles. The automotive giant increased its production by 4.3%, manufacturing an impressive 924,509 vehicles within the month. Fueling the company's solid performance was a favorable surge in domestic demand coupled with a robust recovery of the semiconductor supply chain.
TM’s sales revenues increased 24.2% year-over-year to ¥10.55 trillion ($70.75 billion) for the fiscal first quarter that ended June 30, 2023. Its operating income increased 93.7% year-over-year to ¥1.12 trillion ($7.52 billion). Net income attributable to TM increased 78% year-over-year to ¥1.31 trillion ($8.80 billion), while earnings per share attributable to TM stood at ¥96.74, up 80.6% from the year-ago quarter.
According to a Nikkei report, TM has told its suppliers that it plans to make 150,000 EVs this year, 190,000 in 2024, and 600,000 in 2025.
Analysts expect TM’s revenue and EPS for the fiscal year (ending March 2023) to increase 3.2% and 597.3% year-over-year to $285.31 billion and $18.60, respectively. Also, the company topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.
Over the past year, the stock gained more than 21%. The stock is trading above the 100-day and 200-day moving averages of $163.50 and $151.44, indicating an uptrend. Wall Street analysts expect the stock to reach $207.79 in the next 12 months, indicating a potential upside of 22.6%.
Mercedes-Benz Group AG (MBGAF)
MBGAF, a German car maker with a market cap of over $74 billion, develops, manufactures, and sells premium and luxury cars and vans under the Mercedes-AMG, Mercedes-Benz, Mercedes-Maybach, and Mercedes-EQ brands, as well as related spare parts and accessories.
In a significant development, the company recently signed an agreement with Steel Dynamics Inc. (SDI) to procure over 50,000 tons of carbon-reduced steel annually for its Tuscaloosa, Alabama facility. This transaction signifies an essential step forward in the company's ongoing initiative to decarbonize its worldwide steel supply chain, which is anticipated to enhance its corporate sustainability profile significantly.
It pays an annual dividend of $5.72 per share, translating to a dividend yield of 8.36%. Its four-year average yield is 5.02%. Its dividend payouts grew at a CAGR of 24.2% over the past three years and 14.8% over the past five years.
MBGAF’s trailing-12-month ROCE and ROTA of 18.69% and 5.95% are 64.1% and 54.7% higher than the industry averages of 11.39% and 3.85%, respectively. Its trailing-12-month cash from operations of $17.76 billion is significantly higher than the industry average of $223.80 million.
In terms of forward non-GAAP P/E, MBGAF is trading at 4.74x, 66.2% lower than the industry average of 14.02x. Its forward EV/Sales multiple of 1.03 is 9.2% lower than the industry average of 1.13.
MBGAF’s revenues for the fiscal second quarter that ended June 30, 2023, increased 4.9% year-over-year to €38.24 billion ($40.12 billion). Its adjusted EBIT rose 5.5% from the year-ago quarter to €5.21 billion ($5.47 billion). The company’s net profit and earnings per share rose 13.9% and 14.8% year-over-year to €3.64 billion ($3.82 billion) and €3.34.
Analysts expect MBGAF’s revenue for the fiscal year (ending December 2023) to increase 2% year-over-year to $163.68 billion, and EPS is expected to come at $14.21. Also, the company topped the consensus revenue estimates in three of the trailing four quarters.
Over the past year, the stock gained more than 24%. Wall Street analysts expect the stock to reach $92.40 in the next 12 months, indicating a potential upside of 34.9%. The price target ranges from a low of $73.28 to a high of $125.62.
AB Volvo (publ) (VLVLY)
VLVLY, a Swedish carmaker with over $42 billion market cap, manufactures and sells trucks, buses, and related heavy industrial equipment globally.
Recently, Volvo Defense, a business operation within Volvo Trucks, has entered a framework agreement with the Estonian Centre for Defense Investments and the Ministry of Defense of the Republic of Latvia to deliver logistic trucks. Volvo was chosen as one of two suppliers that combined will deliver up to 3,000 vehicles over seven years. This should bode well for the company.
VLVLY pays an annual dividend of $0.68 per share, translating to a dividend yield of 3.35%. Its four-year average yield is 7.27%. Its dividend payouts grew at a CAGR of 6.1% over the past five years.
VLVLY’s trailing-12-month ROCE, ROTC, and ROTA of 24.77%, 9.43%, and 5.74% are 82.3%, 38.9%, and 13.8% higher than the industry averages of 13.59%, 6.79%, and 5.04%, respectively.
In terms of forward non-GAAP P/E, VLVLY is trading at 8.10x, 52.2% lower than the industry average of 16.94x. Its forward EV/Sales multiple of 1.20 is 26.6% lower than the industry average of 1.64.
During the fiscal second quarter of 2023, VLVLY’s net sales increased 18.4% year-over-year to SEK140.82 billion ($12.71 billion). Its gross income rose 35.5% year-over-year to SEK38.92 billion ($3.51 billion). Its adjusted operating income grew 58.1% from the year-ago quarter to SEK21.73 billion ($1.96 billion).
Furthermore, the company’s income for the quarter grew 2.8% year-over-year to SEK10.82 billion ($976.92 million), and its EPS was SEK5.30, an increase of 3.1% over the previous year’s quarter. Also, its operating cash flow from industrial operations rose 74.4% year-over-year to SEK12.55 billion ($1.13 billion).
Analysts expect VLVLY’s revenue and EPS for the fiscal year (ending December 2023) to increase 3.1% and 44.1% year-over-year to $47.57 billion and $2.49, respectively. Also, the company topped the consensus revenue estimates in three of the trailing four quarters, which is impressive.
Over the past year, the stock gained more than 32% and currently trades above the 200-day moving average of $19.75. Wall Street analysts expect the stock to reach $22.51 in the next 12 months, indicating a potential upside of 11.4%. The price target ranges from a low of $19.25 to a high of $25.58.
Bottom Line
The auto industry in the U.S. represents approximately 4% of the nation's GDP. Therefore, increasing momentum within the industry could propel a more comprehensive economic revival.
Despite obstacles, the auto industry exhibited impressive resilience, maintaining operations, meeting consumer demands, and strategically seeking growth opportunities. The embodiment of this stability is evidenced in the surge of new vehicle sales in August, registering double-digit percentage increases compared to a year ago. Global auto sales for 2023 are anticipated to reach 86.8 million units, surpassing the previous estimate of 86.4 million units.
Considering the overall scenario, the robust financial performances of TM, MBGAF, and VLVLY, combined with their compelling valuation metrics, consistent profitability, dynamic advancements, strategic partnerships, and optimistic analyst estimates, make the stocks more favorable portfolio additions than the Detroit Three, which are currently grappling with the fallout from labor strikes.
