The Summer of Strikes—or at least labor strife—is upon us, and it’s creating buying opportunities for nimble investors in stocks like United Parcel Service.
Signs of Trouble
It’s impossible to miss the headlines about possible work stoppages, massive wage increases, and other worker-related issues. Screenwriters and actors are striking, while UPS just reached a five-year labor deal with the International Brotherhood of Teamsters that would raise wages by roughly 30% cumulative over five years. Now General Motors is in the crosshairs as it negotiates with the United Auto Workers.
Impact on Stocks
Both the possibility of a strike and reaching a deal can create problems for stocks as investors first ignore the possibility of a work stoppage, then worry about one happening, and then worry about the higher costs of a new contract. There isn’t a lot of positivity surrounding labor negotiations.
It doesn’t have to be all doom and gloom for UPS. For starters, labor is an important and necessary cost of doing business, and a deal should be viewed as good news if it helps avoid a costly strike. Yes, there are concerns about higher costs. Teamsters President Sean O’Brien floated a $30 billion figure related to increased wages, significant for a business that generates about $100 billion in sales each year. But O’Brien’s figure is the cumulative increase over the life of the contract. It works out to an average annual wage increase of roughly 5% to 6% a year.
The Outlook for UPS and UAW Negotiations
Investors may be concerned about the recent surge in inflation, but this hasn’t yet affected earnings estimates for UPS. Despite this, analysts are keeping a close eye on the company’s second-quarter earnings conference call on August 8, as it may prompt them to adjust their projections for 2024 and 2025.
However, it is unlikely that these adjustments will be significant. Given the persistent inflation rates over the years, it was not expected that wages would grow by 1% or 2% in the new contract. Analyst Amit Mehrotra from Deutsche Bank believes that UPS’ management team would not enter into a deal that hampers the company’s ability to achieve profitable growth. Mehrotra has a Buy rating on the stock and a target price of $212.
Now that the UPS deal is nearing completion, investors can shift their focus to the upcoming negotiations with the United Auto Workers (UAW). The labor contracts between the UAW and major automakers such as GM, Ford Motor, and Stellantis are set to expire in September. Talks have already begun, and it won’t be surprising if GM faces some stock pressure. In 2019, when the automaker experienced a strike, its shares underperformed the S&P 500 by nearly seven percentage points in August. The downward trend continued in September during the UAW strike. However, once a deal was reached in late October, GM’s stock rallied and outperformed the S&P 500 in November and December.
Considering this historical pattern, analysts like John Murphy from BofA Securities see potential buying opportunities. Murphy has Buy ratings on both GM and Ford, with a price target of $72 per share for GM (an 88% increase from its recent price of $38.34) and a target of $22 for Ford (a 67% increase from its recent price of $13.16).
In conclusion, while uncertainties persist in the market, it’s important to remember that these challenges will eventually subside. Investors should stay informed and seize favorable opportunities when they arise.