Pay Now Or Pay Later? Most Likely Both -- Just A Question Of How Much -- September 18, 2023

Locator: 45689AUTOS. 

Straws that break camels' backs: if the auto manufacturers don't "hold the line" on this one, they will pay dearly five years out -- pensions, healthcare -- 

...it's hard to believe but during the last few years of my medical career in the military, it was widely thought by the warfighting generals that the US military had turned into a healthcare organization -- that's how much healthcare benefits were costing the Pentagon. They knew the model could not be sustained, and that's why Tricare was established. For the first time ever (fact check me on this), retirees had to share in paying for health insurance.

The US military had pockets a lot deeper than the auto industry.

Pensions, healthcare? What is the average "salary" for UPS drivers with healthcare and pensions added in? $170,000 / year.

Link here.

See also: the UAW strike -- an existential issue for US automakers.

From Yahoo! Finance executive editor, Brian Sozzi:

No matter the outcome in 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 auto makers 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 in 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," says JP Morgan analyst Ryan Brinkman.

And what happens when a new contract is reached? The clock on another new one begins, and with it likely bringing further higher costs for the auto giants after 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.

"The clear winner in this Game of Thrones battle between the UAW vs. GM/Ford is Musk and Tesla with champagne now on ice which sits in a non-union position and its biggest potential EV 313 competitors now face mounting costs/complexities in the years ahead depending on how this ultimately plays out," Wedbush Securities analyst Dan Ives says.

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.