The United Auto Workers (UAW) union, representing employees at General Motors (NYSE:GM), Ford (NYSE:F), and Stellantis (NYSE:STLA), recently concluded a six-week-long strike after GM agreed to a substantial pay raise deal that surpasses two decades' worth of raises over four years. This agreement, also adopted by Ford and Stellantis, includes a 25% increase in the maximum hourly wage over four years, faster progression to top wages from entry-level positions, increased retirement benefits, and the UAW's right to strike in case of employer-initiated plant closure.
The strike-induced halt in vehicle production led to considerable losses for Ford. The company reported $100 million in lost profit for Q3 alone due to its failure to produce 80,000 vehicles, amounting to $1.3 billion in pre-tax lost profits.
Ford CFO John Lawler has indicated that the new UAW contract would increase labor costs by between $850 and $900 per vehicle produced. Assuming constant sales under the new contract, Ford's annual labor costs could surge by $1.81 billion. This increase could reduce net profit margins from 3.5% to 2.5%, indicating a nearly 30% decrease in per-share profits.
Considering the average profit margin of 2.5% over the last four years, a 1% reduction could lead to long-term net profit margins falling to 1.5%, translating into a 40% reduction in per-share profits.
Without an upward price adjustment to counterbalance the higher labor cost, the new UAW contract is set to significantly erode Ford's profits. The impact of a 1% reduction becomes more severe with smaller profit margins. Given this situation, some are suggesting that divesting from Ford stock could be a prudent decision.
InvestingPro Insights
In light of the recent developments at Ford, it's crucial to consider some key metrics and insights from InvestingPro. The company's market cap stands at an adjusted 42.27B USD, and it's currently trading at a low earnings multiple with a P/E ratio of 6.84. This suggests that the stock is undervalued, which aligns with one of our InvestingPro Tips indicating that the stock is in oversold territory.
Moreover, Ford's net income is expected to grow this year, despite the increased labor costs. This aligns with another InvestingPro Tip, which suggests that the company will be profitable this year. This is further supported by the fact that Ford has been profitable over the last twelve months and has maintained dividend payments for 12 consecutive years, offering a significant return to shareholders.
InvestingPro data also reveals that Ford's revenue growth over the last twelve months as of Q3 2023 was 14.82%, indicating a healthy financial performance despite the recent challenges. The company's gross profit for the same period was 18.14B USD, which, despite being a weak point according to an InvestingPro Tip, still represents a substantial amount.
In conclusion, while the new UAW contract may increase Ford's labor costs, the company's strong financial performance and undervalued stock price suggest potential for future growth. As always, we recommend considering these insights along with the numerous additional tips available in the InvestingPro product for a comprehensive investment strategy.
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