UAW strike really makes big auto stocks dead money
Auto stocks will probably be parked in neutral for a good while.
No matter the outcome of the headline-grabbing UAW vs. Big Auto strike, it's going to be very hard to make a great case to buy shares of Ford (F) and General Motors (GM) that on the surface look stupid cheap.
I mean, Ford's stock is trading on a forward price-to-earnings multiple of 6.3 times, according to Yahoo Finance data. General Motors forward PE multiple clocks in a less-than-meaty 4.9 times.
The S&P 500 trades on a forward PE of 19.9 times, for a dose of perspective.
Don't be sidetracked by the relative discounts of auto stocks vs. the S&P 500, however. The automaker stocks have "value trap" written all over them for one super simple thesis.
Large automakers are losing huge money on the EV transition that is essentially being forced down their throats by worldwide governments. Consider this: Before any new contract with the UAW, Ford's EV unit was slated to lose $4.5 billion this year. Profits were highly unlikely in 2024 either, and who knows about 2025 or 2026.
General Motors is losing a great deal on EVs too. That comes as the company is losing gazillions of dollars on its tinkering with autonomous vehicles via its Cruise business.
What a new UAW contract likely brings, no matter the outcome, is a much higher cost base for automakers and probably bigger losses from EV operations. While that is unfolding, the higher wages being paid to the UAW will bite the profit margins in the gas-powered businesses from which automakers have been funding their EV roadmaps.
It's a colossal mess for investors in these stocks. A vicious circle of doom!
Not to mention average selling prices on EVs aren't holding firm. Blame Tesla and a fresh rush of lower-end models from GM and overseas automakers.
Whatever the case, EV prices are being dialed down at the same time as costs are about to surge.
"Our net takeaway is that the wage increase and lower working hours/higher headcount, if accepted as proposed, would negatively impact adjusted EBIT [operating profits] by ~$2 billion to ~$3 billion depending on the OEM, before factoring in any increase in benefits, and potential cost cuts and other offsetting actions by the OEMs," JPMorgan analyst Ryan Brinkman wrote.
And what happens when a new contract is reached? The clock on another new one begins, likely bringing higher costs for the auto giants, as the UAW is probably going to win this round.
I am no rocket scientist, but that cost impact estimated by Brinkman isn't fertile ground for a profit boom that lights a fire under auto stock valuations.
It's Tesla's EV game to lose pros like Wedbush analyst Dan Ives thinks.
The long-time Tesla bull believes the legacy players will face years of mounting costs due to pressure from the UAW and as a result, weak profits. That is a red meat backdrop for a voracious player such as Tesla.
In the end, it may just be the UAW that funds the next huge acquisition by Tesla's Elon Musk. And should that deal cross the newswires, best believe it would come alongside a lot of red ink at Ford, General Motors, and Stellantis.
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations, or anything else? Email brian.sozzi@yahoofinance.com.
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