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.
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 (ticker: 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
(GM) is in the crosshairs as it negotiates with the United Auto Workers.
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.
Just look at UPS stock. Its shares underperformed
FedEx
(FDX) by as many as four percentage points in recent weeks since the Teamsters authorized a strike in late June, but then outperformed FedEx heading into this past week’s trading. Then came the deal and UPS is back to trailing FedEx by about three points after its stock fell 1.9% on the day of the announcement.
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.
That might still sound high to investors, but it hasn’t shown up in earnings estimates yet. Analysts left their 2024 and 2025 earnings projections unchanged, though they might move numbers after hearing from UPS management on the company’s second-quarter earnings conference call slated for Aug. 8.
Just don’t expect them to change much. No one was expecting wages to grow by 1% or 2% in the new contract when inflation has been raging for years. “[We] believe UPS’ management team wouldn’t do a deal that restricts the company’s ability to achieve profitable growth,” writes Deutsche Bank analyst Amit Mehrotra, who has a Buy rating and a $212 price target for the stock.
With the UPS deal mostly done—union member voting runs through most of August—investors can turn their attention to the UAW negotiations. The union’s labor deals with GM,
Ford Motor
(F), and
Stellantis
(STLA) all expire in September, and the parties are talking now. Don’t be surprised if GM stock comes under pressure soon. When the auto maker suffered a strike in 2019, shares underperformed the
S&P 500
by almost seven percentage points in August, the month auto negotiations typically heat up. They dropped again in September as the UAW strike began. When a deal was finally reached in late October, GM rallied and outperformed the S&P 500 in November and December.
If history repeats, it should be viewed as a buying opportunity, writes BofA Securities analyst John Murphy, who has Buy ratings on GM and Ford. His GM stock price target is $72 a share, up 88% from a recent $38.34, and he has a $22 target on Ford, up 67% from a recent $13.16.
This too shall pass.
Write to Al Root at [email protected]
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