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Key Takeaways for General Motors Stock:
- GM Canada workers just matched the agreement between Unifor and Ford, where we think they left money on the table – and investors may be missing out on a highly discounted stock.
- We’re waiting to update our fair value estimate, which currently implies a discount for General Motors stock of around 60% until we see the duration of the UAW strike for GM in the US.
- Investors could be overselling the strike if the UAW doesn’t last long and may be overconcerned about a recession if GM’s new demand-pull model allows the company to break even at the bottom of an economic cycle.
Andrew Willis: Did you know that compared to ‘old’ GM in 2015, ‘new’ GM’s total U.S. hourly labour costs are now less than a third of what they used to be? Or how about here in Canada, where GM workers make only $2 more per hour to start than they did 28 years ago?
Meanwhile, wages haven’t been that different between the Big 3 automakers – that is until the recent agreement at Ford Canada with Unifor, where sector strategist David Whiston thinks members still left some money on the table. GM Canada and Unifor did just match the agreement but the deal has yet to be ratified, and only 54% of Ford Canada members approved their deal. Members, especially those at the UAW in the U.S., could still be far from management when it comes to wages.
General Motors Stock May Be Oversold on Strike Fears
That said, investors may also be way off in assessing the impact of the strikes. The market’s currently at a 60% discount to our fair value estimates, yet we don’t know the duration of the remaining labour action. And if the selling is on recession fears, keep in mind that ‘new’ GM works on a demand-pull model – so they should do no worse than break even, even if the company and fewer customers are able to strike a deal.
For Morningstar, I’m Andrew Willis.
GM Bulls Say
- GMNA's breakeven point of about 10 million-11 million units is drastically lower than it was under old GM. Earnings should grow rapidly as GM becomes more cost-efficient.
- GM's U.S. hourly labor cost is about $5 billion compared with about $16 billion in 2005 under old GM.
- GM can charge thousands of dollars more per vehicle in light-truck segments. Higher prices with fewer incentive dollars allow GM to get more margin per vehicle, which helps mitigate a severe decline in light-vehicle sales and falling market share.
GM Bears Say
- GM may have to see a U.S. recession to prove it can do much better than old GM before the market will award the stock a higher P/E multiple. The recession came in 2020, and may again in 2023, but the P/E multiple well after the downturn is uncertain.
- Auto stocks often sell off severely because of macroeconomic concerns, even if the bottom-up story looks attractive.
- The U.S. auto market is becoming more crowded each year. Hyundai-Kia, Tesla, and other firms such as new entrants from China and EV startups may take more share over time from existing players such as GM.
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