One of the biggest questions facing automakers in a few years was this: "Will new labor contracts cripple profits?" The negotiations between United Auto Workers (UAW) and major automakers can sometimes get bitter, and with the former aggressively going after the best contracts in recent memory, it was an ominous development for auto investors.
Fortunately, we may already have an answer to the previous question, and it appears to be good news for Ford Motor Company (F 1.69%) and General Motors (GM 1.70%) investors.
Big contracts, big costs
From the start of negotiations, the UAW made it clear it was going for an ambitious contract that would aim to be the largest amount of gains in wages seen in years. That goal was fairly well accomplished, and the price tag for the new contract hit automakers like Ford and General Motors hard.
In fact, Ford anticipates the new UAW contract to cost roughly $8.8 billion -- two times the initial expectation -- over the four-and-a-half-year deal. Ford's crosstown rival, GM, predicts its deal with UAW and Canadian union Unifor will cost up to $9.3 billion.
Those are big figures when you consider Ford's updated full-year guidance calls for adjusted earnings before interest and taxes (EBIT) in the range of $10 billion to $10.5 billion. Investors are already seeing real impact, as Ford lowered its guidance due to the new contracts from a previous range of $11 billion to $12 billion.
Let's put those figures into perhaps more understandable numbers for investors. Ford's new UAW contract will increase costs per vehicle by roughly $900. GM's number is actually lower because it employs roughly 10,000 fewer UAW members than its cross-town rival; GM expects its per-vehicle costs to increase as much as $575 on average throughout the life of the contract.
Question answered?
One of the biggest questions now facing major automakers is if they can offset these drastic cost increases. While investors should take these initial comments with a grain of salt -- we don't really expect management to fold and say they're going to go out of business -- both Ford and GM appear confident they can almost completely offset these wage increases.
GM management said it's preparing a 2024 budget that should offset much of the increases already. In fact, GM is working to cut $3 billion in fixed costs by the end of 2024.
Further, and grain of salt still in hand, it appears labor cost is less significant than it was in the past. "Labor cost is not as significant from an overall cost perspective as it was in the past," Michael Ward, equity research analyst at Benchmark, told Automotive News. "GM and Ford should be able to offset most of the increase in labor costs with other improvements."
To be fair, if GM management is puffing out its chest to show confidence, it's at least putting its money where its mouth is. GM announced it would buy back $10 billion in shares while also increasing its dividend 33%. If management can confidently announce that right after contract negotiations, they're doing everything they can to appear at ease as they work their 2024 budget to mostly offset the new contracts.
Are the stocks a buy?
Investing in cyclical industries, especially the automotive industry, which is notoriously capital intensive, isn't for everyone. However, for value investors, or perhaps income investors, there's a compelling case for both Ford and General Motors right now. Ford and GM trade at a cheap price-to-earnings ratio of 7 and 4.7 times earnings, respectively, and have declined 16% and 12%, respectively, compared to the market's 17% gain over the past year.
On top of being cheap, Ford also offers income investors a juicy 5.4% dividend yield. While GM's yield is much lower, management's recent decision to boost the dividend 33% with a $10 billion share buyback plan shows willingness to return value to shareholders.
If management of both automakers prove they can execute and offset much of the new labor costs, this could be a great entry point into the two Detroit auto stocks before they bounce back.
Daniel Miller has positions in Ford Motor Company and General Motors. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
FAQs
Though both stocks are trading dirt cheap when compared to the industry, GM appears more attractive at the moment. While the price of Ford shares at $12.14 is significantly lower than General Motors' $42.37 per share, GM offers more value considering the P/E and P/S metrics.
Is GM stock a buy right now? ›
General Motors Company (GM) is a stock many investors are watching right now. GM is currently holding a Zacks Rank of #2 (Buy) and a Value grade of A.
Is Ford stock a good long term buy? ›
Buying a great company with a robust outlook at a cheap price is always a good investment, so let's also take a look at the company's future expectations. Ford Motor's earnings over the next few years are expected to increase by 69%, indicating a highly optimistic future ahead.
What is the prediction for Ford stock? ›
Ford Motor Company Stock Forecast
The 13 analysts with 12-month price forecasts for Ford Motor Company stock have an average target of 14.18, with a low estimate of 10 and a high estimate of 20. The average target predicts an increase of 13.53% from the current stock price of 12.49.
Is GM doing better than Ford? ›
GM has gained an edge in recent years on the back of better financials and early moves into electric and autonomous vehicles. GM most recently reported third-quarter results that, compared to Ford, knocked it out of the park.
Is GM stock worth keeping? ›
General Motors's analyst rating consensus is a Moderate Buy. This is based on the ratings of 19 Wall Streets Analysts.
Is Ford a good stock to buy right now? ›
The highest analyst price target is $21.00 ,the lowest forecast is $9.75. The average price target represents 17.78% Increase from the current price of $12.15. Ford Motor's analyst rating consensus is a Hold.
Is GM over or undervalued? ›
First, GM stock itself appears significantly undervalued compared to the rest of the auto industry. Second, the market appears to overstate Tesla's viability ahead of serious challenges for the EV pioneer.
What will GM stock be worth in 5 years? ›
General Motors stock price stood at $44.53
According to the latest long-term forecast, General Motors price will hit $55 by the end of 2024 and then $75 by the end of 2025. General Motors will rise to $85 within the year of 2026, $95 in 2027, $110 in 2028, $125 in 2030 and $150 in 2035.
Can Ford stock reach $100? ›
In conclusion, while Ford has the potential to reach $100 per share, it faces significant challenges that could hinder its stock price growth. Ford Motor Company's stock reaching $100 seems a daunting task, given it would require a 7.3x increase from its current price.
Ford Motor Company - Hold
Its Value Score of A indicates it would be a good pick for value investors.
Should I buy Ford stock 2024? ›
I recommend buying Ford stock before the earnings event. The analysts' consensus estimate calls for Ford to have generated revenue of $40.64 billion in Q1 of 2024. That's only up 4% year over year, not an ultra ambitious forecast. Wall Street expects Ford will have earned 42 cents per share.
Is Ford safe to invest in? ›
Latest business results. Shares of Ford jumped 6% right after it reported 2023 fourth-quarter financial results. It's safe to say that investors were pleased with how the business wrapped up the year. Ford posted a 4.5% revenue increase in Q4 and an 11.4% rise for the full year.
Who is the largest shareholder of Ford? ›
The top shareholders of Ford are William Clay Ford, James D. Farley, James P. Hackett, Vanguard Group Inc., BlackRock Inc. (BLK), and Newport Trust Co.
Is Ford a good investment for the future? ›
Ford Motor Company
Shares have had a positive start to the year thus far, which is attracting investor attention. Ford (F 1.80%) had a strong 2023. Its revenue was up 18.1%, as it sold 182,000 more units than the year before. The results were driven by favorable pricing trends.
Is Ford more profitable than GM? ›
GM, for its part, posted net income of $9.9 billion on revenue of $157 billion for the year. Ford was in the red last year, posting a net loss of $2 billion on revenue of $158.1 billion.
What is better quality, Ford or Chevy? ›
On average, Chevrolet vehicles earn higher reliability scores than their Ford counterparts. Though some vehicles don't currently have predicted reliability scores, among the models that are rated, the Chevrolets have an average rating of 84.9 out of 100 compared to the Fords' average rating of 82.4.
Is GM or Ford more successful? ›
Key Takeaways. Ford and General Motors are the two biggest automakers in the United States and are also big players on the world stage. General Motors leads in US market share.
Is Ford a good stock to buy? ›
F Stock Forecast FAQ
Ford Motor has 17.78% upside potential, based on the analysts' average price target. Ford Motor has a conensus rating of Hold which is based on 5 buy ratings, 6 hold ratings and 2 sell ratings. The average price target for Ford Motor is $14.31.
