At this point, it's all over but the accounting.
On Monday, Oct. 30, 2023, the United Auto Workers (UAW) labor union representing workers at Ford Motor Company (F 1.92%), General Motors Company (GM +0.60%), and Stellantis (STLA 5.46%) called a halt to its six-week-long strike at Big 3 automakers automotive plants. The return to work followed GM's agreement this week to join Ford and Stellantis in offering UAW workers an historic deal -- more pay raises over the next four years, than they've received in the past two decades combined.
NYSE: STLA
Key Data Points
What did the workers get?
The pay hikes won't go into effect until UAW workers ratify the contracts, a process that could take a few more weeks to happen. But once it does happen, unionized American autoworkers can expect to receive a total increase of 25% to their maximum hourly wage over the next four years. Additionally, the time to rise from entry-level wages to the top will shrink to just three years.
Improved retirement benefits (including an extra $2500 in payments to current retirees and their spouses) and a right to call a labor strike any time an employer attempts to close down a plant are also included in the agreement.
What does it mean for Stellantis investors?
Stellantis employees can soon expect to earn as much as $42 an hour at the top of the pay scale -- but that's only the start. Factor in fringe benefits, and analysts estimate the total labor cost to Stellantis (and its peers) could approach $90 an hour. So what does this mean for investors in Stellantis stock?
Combined with the effects of a related strike by Canadian Unifor labor union members, Stellantis says it has lost 50,000 sales -- and 3 billion euros in revenue -- from this strike already, according to a transcript of a Stellantis Q3 sales call prepared by S&P Global Market Intelligence.
But that's just the start of the bad news.
According to Ford Chief Financial Officer John Lawler, the new UAW contract will eventually add $850 to $900 in labor costs for each vehicle Ford builds. And seeing as the agreements signed by Ford, GM, and Stellantis all encompass roughly the same wage concessions, it's likely Stellantis will incur similar higher labor costs. So how much of a bite might this take out of Stellantis's profits going forward?
Consider: Through the end of Q3, Stellantis has reported 1.18 million U.S. car and truck sales, putting the company on track for perhaps 1.58 million sales through the end of this year. Times $900 in additional labor costs per vehicle, this implies that going forward, Stellantis's annual labor costs could rise by $1.42 billion.
Also, this estimate assumes that most vehicles that Stellantis sells in the U.S. are also made by U.S. workers. But according to one survey, only about 72% of Stellantis's U.S. vehicle sales are also made in the USA. It also assumes constant sales. Should Stellantis's sales fall, as they did in Q1 and Q3, the added costs of sales would likewise fall. But should sales grow, as they did in Q2, costs would also rise.
What will that mean for Stellantis's profit margins?
That being said, assuming Stellantis's labor cost does rise by $1.42 billion, this would still work out to only 0.7% of the $207.4 billion in revenue Stellantis recorded over the last 12 months. Going forward, therefore, it seems likely Stellantis will see only a 0.7% or smaller impact on its long-term net profit margin.
It's worth pointing out, moreover, that this is the smallest hit to profit margins that any of the Big 3 automakers are likely to suffer -- a consequence of Stellantis having far lower exposure to the North American market (49%) than Ford (67%) or GM (82%).
It's also worth pointing out that of the Big 3, Stellantis is best positioned to endure a hit to profit margins of any size. Over the last 12 months, in fact, Stellantis's 10.4% net profit margin has dwarfed both the 3.5% margin at Ford and the 5.8% margin at GM. Even after absorbing the costs of higher spending on U.S. labor, therefore, it's likely Stellantis could maintain a profit margin of about 9.7%.
Long story short, while higher labor costs are rarely "good news" for the company that must pay them, in the case of Stellantis, the news is much better than for Ford or GM. Now consider further that:
- Stellantis is the only Big 3 automaker to boast more cash than debt on its balance sheet.
- Stellantis pays the biggest dividend yield of the three (7.5%).
- And Stellantis stock costs a mere 2.8 times trailing earnings -- cheaper than either Ford or GM.
Now that its UAW strike troubles are behind it, the case for buying Stellantis stock looks stronger than ever.
