WPRT - Auto sector wildcard: The UAW contract expiration is looming

2023-07-10 07:20:16 ET

The automobile sector will see anxiety ramp up over the next two months as the expiration of the United Auto Workers labor contract with the Big Three Detroit automakers gets closer. The current collective bargaining agreement, which cover more than 150K employees, will expire on September 14.

Stellantis ( STLA ) will be the lead negotiator with the UAW this cycle to set the stage for later talks with General Motors ( NYSE: GM ) and Ford ( F ). The labor talks are anticipated to center around key sticking points such as job security during the electric vehicle transition, cost of living adjustments, organizing EV Gigafactories, as well as the tiered pay structure of the UAW, where senior members earn more from OEMs. UAW President, Shawn Fain has already publicly taken an aggressive, hardline stance on negotiations and has promised a long fight with no further concessions.

Ahead of the late summer showdown, Evercore ISI analyst Chris McNally said the probability of a UAW strike is always around 25%, although the other 75% outcome typically means a last 48-hour nail biter. "Furthermore, we believe this year’s edition of negotiations represents a much higher, 50/50 chance of strike, well beyond our normal' base case but a (manageable) risk to stocks regardless of the probability.

Of note, automobile stocks have traded higher following resolution and contract ratification in the past, in what has typically been a recovery from aggressive selloffs during the contract talks. This time around, McNally thinks Stellantis ( STLA ) is the North American automaker with the most risk, while suppliers ( MBLY ) and Magna International ( MGA ) are the suppliers that could see some selling pressure around fears of a long strike. Aptiv ( APTV ), BorgWarner ( BWA ), and Lear ( LEA ) are also identified as potential buy-the-dip stocks around UAW developments. Notably, supplier stocks have benefitted significantly after contract agreement and ratification in the past, with low-to-high recoveries of about 15% to 20% as fears of a prolonged strike give way to the removal of UAW risk overhangs for the broad auto sector.

Auto supplier stocks: Adient ( ADNT ), Allison Transmission ( ALSN ), American Axle & Manufacturing ( AXL ), Aptiv ( APTV ), Autoliv ( ALV ), BorgWarner ( BWA ), China Automotive Systems ( CAAS ), Cooper-Standard ( CPS ), Dana ( DAN ), Douglas Dynamics ( PLOW ), Garrett Motion ( GTX ), Gentex ( GNTX ), Gentherm ( THRM ), Johnson Controls ( JCI ), Lear ( LEA ), LKQ ( LKQ ), Modine Manufacturing ( MOD ), Monro ( MNRO ), Motorcar Parts of America ( MPAA ), Standard Motor Products ( SMP ), Superior Industries ( SUP ), Visteon ( VC ), Voxx International ( VOXX ),  and Westport Fuel Systems ( WPRT ).

More on the auto sector:

• General Motors: The Raised Guidance Failed To Convince The Bulls
• Ford: Surprisingly Still Undervalued
• Seeking Alpha's Quant Ratings across automobile manufacturer stocks
• Seeking Alpha's Quant Ratings across auto parts stocks

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