Labor Negotiations: A Summer of Opportunities for Investors

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Summer 2023 has brought concerns about rising inflation and its impact on labor costs. However, amidst all the worry, labor negotiations can also present opportunities for investors.

Recent developments in the labor landscape include a tentative agreement between American steel maker Cleveland-Cliffs (CLF) and the workers at one of its iron-ore mines in Minnesota. This follows similar deals reached by United Parcel Service (UPS) and Boeing (BA) supplier Spirit AeroSystems (SPR).

Cleveland-Cliffs CEO Lourenco Goncalves expressed gratitude for the unwavering support of the United Steelworkers throughout the years and believes that this new labor agreement for their Northshore mine will strengthen their collaborative partnership. While details of the agreement are being kept under wraps until it is ratified, it is clear that Cliffs’ strong relationship with the United Steelworkers is benefiting the company and its stockholders.

In another labor-related development, United States Steel (X) is currently evaluating bids for the company and its assets. Cleveland-Cliffs, being one of the bidders, has the backing of the union, which puts it in a favorable position to win the bidding war. However, it’s important to note that union support does not guarantee Cliffs’ acquisition of United States Steel. Another bidder may emerge with a better offer, but the union’s endorsement certainly helps Cliffs’ cause.

Labor negotiations within the automotive industry are also attracting significant attention. The United Auto Workers and the Detroit Three automakers – Ford Motor (F), General Motors (GM), and Stellantis (STLA) – are currently engaged in discussions to replace a four-year deal set to expire in mid-September.

UAW President Shawn Fain has expressed frustration over the slow pace of negotiations, adding to concerns about a possible strike. As a result, shares of Stellantis, Ford, and GM have experienced recent declines of approximately 8%, 9%, and 13% respectively, while the broader market, represented by the S&P 500 and Dow Jones Industrial Average, has only seen a decline of about 2%.

In conclusion, while the cost of staff is a pressing concern, labor negotiations also present potential opportunities for investors. The outcomes of these negotiations will have ripple effects across various industries and can significantly impact the trajectory of individual companies and their stock prices.

Nervousness Creates Buying Opportunity in Automotive Stocks

Morgan Stanley analyst Adam Jonas believes that the current nervousness among investors presents a unique opportunity in the automotive industry. While concerns about a potential UAW strike are valid, Jonas argues that the risks are manageable and should not deter investors. He reminds clients that labor talks occur every four years and asserts that any dip in stock prices should be seen as a buying opportunity.

Jonas recommends purchasing Ford and GM shares, setting a price target of $16 and $41, respectively. Both targets are well above the current stock prices. It’s worth noting that Stellantis, the parent company of Chrysler, is covered by other analysts.

This view is supported by BofA Securities analyst John Murphy, who expressed similar sentiments earlier this year. However, rising labor costs remain a potential concern. Wedbush analyst Dan Ives points out that if labor costs increase faster for the Detroit Three automakers compared to nonunion EV manufacturers like Tesla and Rivian Automotive, it may hinder traditional automakers’ ability to catch up in new technology.

Despite these challenges, Jonas emphasizes that negotiations are a normal part of the industry and expects a reasonable resolution in due course. While the automotive stocks are currently under pressure, the majority of experts anticipate a positive outcome for all involved.

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