Auto Industry Turmoil Causes Interest in 3 Top Stocks Over GM, Ford, and Stellantis


The automotive industry has been navigating a tumultuous period, surrounded by a still high inflation and rising interest rates. Although a resurgence in electric vehicle demand has provided a fleeting respite, residual tension is palpable due to potential strikes led by the United Auto Workers (UAW) union at Stellantis (STLA), Ford Motor Company (F), and General Motors (GM).

The UAW, representing 46,000 GM workers, 57,000 Ford employees, and 43,000 STLA workers, initiated negotiations with the auto giants in July. Historically, the UAW would choose one from these Detroit Three to lead the talks, using it as a blueprint for the remaining deals. However, this time, union President Shawn Fain has opted to negotiate with all three simultaneously after reporting no significant progress with Ford and GM.

About 25,000 UAW members associated with the Detroit Three, representing about 17% of the total membership, are striking at 43 facilities across 21 states. In Michigan alone, two automotive plants – each owned by GM and Ford – and 13 parts distribution centers are impacted, affecting over 9,000 UAW members.

A pivotal demand for the UAW is the elimination of the two-tier wage system, which sees new hires earning significantly less than the veterans. The union is expected to advocate for the reinstatement of pay raises tied to living costs and retirement benefits reduced during the 2008-2009 financial crisis.

Armed with the awareness of automakers' recent financial success and considering substantial executive compensation and sizeable federal subsidies for EV sales, the UAW is pressing for notable salary increases. It also demands the restoration of defined benefit pensions for all workers, reducing the work week to 32 hours, ensuring job security, and ending the use of temporary workers.

Despite challenging negotiations, STLA has proffered a significant offer to the union. Further, talks with Ford are advancing, outlining agreeable terms on wages and benefits.

Impacts of the Strike

On the Detroit Three

As the UAW strike enters its third week, broadening its scope to encompass Ford and GM, an ominous cloud looms over the U.S. automobile industry. Industry experts have expressed concerns, cautioning that these actions could potentially fast-track these corporations toward bankruptcy.

According to prior estimates by Deutsche Bank, a comprehensive strike impacting all car manufacturers could result in losses between $400 million to $500 million per week, assuming all production is stalled. While some losses may be offset with increased production rates once the strike concludes, this option becomes less likely if the labor dispute prolongs for weeks or months.

In fiscal 2019, GM's fourth-quarter earnings suffered significantly due to the 40-day UAW strike, with profits plunging by $3.6 billion. Morgan Stanley analyst Adam Jonas assessed that one month of total production loss could equal between $7 billion and $8 billion in forfeited profits across all three auto giants.

While the ongoing strike has largely impacted Detroit automakers, its effect on GM’s third-quarter new vehicle sales in the U.S. was limited. GM reported a promising 21.4% surge in sales from July through September, outpacing industry anticipations of a 15% to 16% increase. Sales across all of GM’s brands experienced a year-over-year growth.

However, STLA witnessed a 1.3% downfall in sales during the third quarter, an outcome more likely linked to its pricing strategy than the UAW labor dispute.

Although the impact of work stoppages has not yet affected GM and other firms, potential supply chain disruptions and sales complications may arise if the strike extends or amplifies. The dispute's ramifications could grow significantly in October, particularly concerning specific models such as the Chevrolet Colorado and GMC Canyon midsize pickups that have already witnessed production reduction.

The prevailing strike could taint the reputation of the auto behemoths, leading to customer dissatisfaction due to potential delays, cancellations, or quality issues resulting from the strike.

Furthermore, strike-induced increased production costs could dampen profits for these car manufacturers, forcing them to offer higher wages and benefits to UAW employees. This could adversely affect their financial standing, limiting their capacity to invest in new technologies, products, and markets.

Job Loss

The economic impact so far has been relatively subdued compared to preliminary expectations before the UAW's unexpected strategy of targeting specific plants. It is essential to recognize the increasing job losses, coupled with layoffs in ancillary automotive suppliers, which are expected to intensify in the upcoming days.

F’s additional 330 layoffs at the Chicago stamping plant and the Lima engine plant amid the ongoing strike brought the laid-off workers to 930.

According to predictions by the University of Michigan economist Don Grimes, Michigan is projected to see up to 18,495 job cuts by the end of the week, including layoffs in auto suppliers, and are a direct consequence of the escalating strike tactics deployed by the UAW. Nationwide, potential job losses are predicted to reach up to 65,640 this week.

However, these job losses could have been significantly higher if the UAW had followed the conventional approach of targeting all operations of a single automaker when contract negotiations reached an impasse.

On the Economy

As per the University of Michigan economist Don Grimes, the UAW strike timing is especially troublesome for economic growth overall, given that October typically heralds the beginning of student loan repayments following a pause that had lasted for over three years, shrinking consumer savings due to depleted emergency funds accumulated during the pandemic and the rising interest rates that are expected to beset overall growth.

Moody's economist, Mark Zandi, said, "If the UAW strike lasts through the end of October as we anticipate, it will reduce annualized real GDP growth in the fourth quarter by another estimated 0.3 percentage point."

This estimate considers the direct impact of stalled car and parts manufacturing potential downstream effects on suppliers and auto dealers, coupled with decreased spending due to wage losses incurred by workers participating in the strike. With the collective weight of these adverse factors, the U.S. economy could head into a challenging fourth quarter.

On Competitors

As the strike impacts the Detroit Three, industry players Toyota Motor Corporation (TM), Mercedes-Benz Group AG (MBGAF), and AB Volvo (publ) (VLVLY) could significantly benefit from the chaos.

These automotive titans, having unions such as Germany's IG Metall, Sweden's IF Metall and Unionen, and Japan's Toyota Motor Workers’ Union, have a limited presence in UAW.

Such companies stand to service customers seeking alternatives to products from the Detroit Three. By continuing to deliver reliable and high-quality vehicles, its strong suit being luxury sedans, SUVs, and EVs, these automakers could further enhance their reputations and customer loyalty.

Additionally, these corporations could utilize their global footprint and remarkable efficiency to sustain a competitive edge and maintain a leadership position in innovation.

Auto industry powerhouses TM, MBGAF, and VLVLY have also invested substantially in pioneering technologies such as electrification, autonomous driving, and connectivity.

Contemplating the advantage these three car manufacturers currently hold over the Detroit Three amid unresolved worker strikes, it seems prudent to examine the other elements making their stocks an attractive investment endeavor now:

Toyota Motor Corporation (TM)

Based in Toyota, Japan, TM, with a market cap of over $229 billion, manufactures and sells passenger, minivans, commercial vehicles, and related parts and accessories globally.

It pays an annual dividend of $4.99 per share, translating to a dividend yield of 2.55%. Its four-year average yield is 2.81%. Its dividend payouts grew at a CAGR of 1.6% over the past three years and 1.3% over the past five years.

TM’s trailing-12-month EBIT and EBITDA of 8.33% and 12.62% are 13.2% and 14.3% higher than the industry averages of 7.36% and 11.04%, respectively. Its trailing-12-month cash from operations of $24.60 billion is significantly higher than the industry average of $223.80 million.

In terms of forward P/E, TM is trading at 9.12x, 36.1% lower than the industry average of 14.28x. Its forward Price/Cash Flow multiple of 5.28 is 26.7% lower than the industry average of 7.95.

TM’s global sales report for August 2023 notched an impressive 9% year-over-year growth to 923,180 vehicles. The automotive giant increased its production by 4.3%, manufacturing an impressive 924,509 vehicles within the month. Fueling the company's solid performance was a favorable surge in domestic demand coupled with a robust recovery of the semiconductor supply chain.

TM’s sales revenues increased 24.2% year-over-year to ¥10.55 trillion ($70.75 billion) for the fiscal first quarter that ended June 30, 2023. Its operating income increased 93.7% year-over-year to ¥1.12 trillion ($7.52 billion). Net income attributable to TM increased 78% year-over-year to ¥1.31 trillion ($8.80 billion), while earnings per share attributable to TM stood at ¥96.74, up 80.6% from the year-ago quarter.

According to a Nikkei report, TM has told its suppliers that it plans to make 150,000 EVs this year, 190,000 in 2024, and 600,000 in 2025.

Analysts expect TM’s revenue and EPS for the fiscal year (ending March 2023) to increase 3.2% and 597.3% year-over-year to $285.31 billion and $18.60, respectively. Also, the company topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.

Over the past year, the stock gained more than 21%. The stock is trading above the 100-day and 200-day moving averages of $163.50 and $151.44, indicating an uptrend. Wall Street analysts expect the stock to reach $207.79 in the next 12 months, indicating a potential upside of 22.6%.

Mercedes-Benz Group AG (MBGAF)

MBGAF, a German car maker with a market cap of over $74 billion, develops, manufactures, and sells premium and luxury cars and vans under the Mercedes-AMG, Mercedes-Benz, Mercedes-Maybach, and Mercedes-EQ brands, as well as related spare parts and accessories.

In a significant development, the company recently signed an agreement with Steel Dynamics Inc. (SDI) to procure over 50,000 tons of carbon-reduced steel annually for its Tuscaloosa, Alabama facility. This transaction signifies an essential step forward in the company's ongoing initiative to decarbonize its worldwide steel supply chain, which is anticipated to enhance its corporate sustainability profile significantly.

It pays an annual dividend of $5.72 per share, translating to a dividend yield of 8.36%. Its four-year average yield is 5.02%. Its dividend payouts grew at a CAGR of 24.2% over the past three years and 14.8% over the past five years.

MBGAF’s trailing-12-month ROCE and ROTA of 18.69% and 5.95% are 64.1% and 54.7% higher than the industry averages of 11.39% and 3.85%, respectively. Its trailing-12-month cash from operations of $17.76 billion is significantly higher than the industry average of $223.80 million.

In terms of forward non-GAAP P/E, MBGAF is trading at 4.74x, 66.2% lower than the industry average of 14.02x. Its forward EV/Sales multiple of 1.03 is 9.2% lower than the industry average of 1.13.

MBGAF’s revenues for the fiscal second quarter that ended June 30, 2023, increased 4.9% year-over-year to €38.24 billion ($40.12 billion). Its adjusted EBIT rose 5.5% from the year-ago quarter to €5.21 billion ($5.47 billion). The company’s net profit and earnings per share rose 13.9% and 14.8% year-over-year to €3.64 billion ($3.82 billion) and €3.34.

Analysts expect MBGAF’s revenue for the fiscal year (ending December 2023) to increase 2% year-over-year to $163.68 billion, and EPS is expected to come at $14.21. Also, the company topped the consensus revenue estimates in three of the trailing four quarters.

Over the past year, the stock gained more than 24%. Wall Street analysts expect the stock to reach $92.40 in the next 12 months, indicating a potential upside of 34.9%. The price target ranges from a low of $73.28 to a high of $125.62.

AB Volvo (publ) (VLVLY)

VLVLY, a Swedish carmaker with over $42 billion market cap, manufactures and sells trucks, buses, and related heavy industrial equipment globally.

Recently, Volvo Defense, a business operation within Volvo Trucks, has entered a framework agreement with the Estonian Centre for Defense Investments and the Ministry of Defense of the Republic of Latvia to deliver logistic trucks. Volvo was chosen as one of two suppliers that combined will deliver up to 3,000 vehicles over seven years. This should bode well for the company.

VLVLY pays an annual dividend of $0.68 per share, translating to a dividend yield of 3.35%. Its four-year average yield is 7.27%. Its dividend payouts grew at a CAGR of 6.1% over the past five years.

VLVLY’s trailing-12-month ROCE, ROTC, and ROTA of 24.77%, 9.43%, and 5.74% are 82.3%, 38.9%, and 13.8% higher than the industry averages of 13.59%, 6.79%, and 5.04%, respectively.

In terms of forward non-GAAP P/E, VLVLY is trading at 8.10x, 52.2% lower than the industry average of 16.94x. Its forward EV/Sales multiple of 1.20 is 26.6% lower than the industry average of 1.64.

During the fiscal second quarter of 2023, VLVLY’s net sales increased 18.4% year-over-year to SEK140.82 billion ($12.71 billion). Its gross income rose 35.5% year-over-year to SEK38.92 billion ($3.51 billion). Its adjusted operating income grew 58.1% from the year-ago quarter to SEK21.73 billion ($1.96 billion).

Furthermore, the company’s income for the quarter grew 2.8% year-over-year to SEK10.82 billion ($976.92 million), and its EPS was SEK5.30, an increase of 3.1% over the previous year’s quarter. Also, its operating cash flow from industrial operations rose 74.4% year-over-year to SEK12.55 billion ($1.13 billion).

Analysts expect VLVLY’s revenue and EPS for the fiscal year (ending December 2023) to increase 3.1% and 44.1% year-over-year to $47.57 billion and $2.49, respectively. Also, the company topped the consensus revenue estimates in three of the trailing four quarters, which is impressive.

Over the past year, the stock gained more than 32% and currently trades above the 200-day moving average of $19.75. Wall Street analysts expect the stock to reach $22.51 in the next 12 months, indicating a potential upside of 11.4%. The price target ranges from a low of $19.25 to a high of $25.58.

Bottom Line

The auto industry in the U.S. represents approximately 4% of the nation's GDP. Therefore, increasing momentum within the industry could propel a more comprehensive economic revival.

Despite obstacles, the auto industry exhibited impressive resilience, maintaining operations, meeting consumer demands, and strategically seeking growth opportunities. The embodiment of this stability is evidenced in the surge of new vehicle sales in August, registering double-digit percentage increases compared to a year ago. Global auto sales for 2023 are anticipated to reach 86.8 million units, surpassing the previous estimate of 86.4 million units.

Considering the overall scenario, the robust financial performances of TM, MBGAF, and VLVLY, combined with their compelling valuation metrics, consistent profitability, dynamic advancements, strategic partnerships, and optimistic analyst estimates, make the stocks more favorable portfolio additions than the Detroit Three, which are currently grappling with the fallout from labor strikes.

Bank of America (BAC) Under the Spotlight: Buy or Sell in the Face of Inflation Concerns?

In the aftermath of three regional banking collapses earlier this year, the U.S. banking sector has wrestled amid dwindling deposits with customers seeking higher yields, escalated deposit costs, low loan growth, and shrinking profit margins. However, the industry showcased a degree of stability.

This semblance of recovery emerged as the Federal Reserve raised the benchmark interest rates to the peak in over two decades, a trend anticipated to reverse in the upcoming year. Typically, increased interest rates produce gains for banks through elevated net interest income.

Nevertheless, the U.S. banking sector persists in hemorrhaging deposits. Deposits have declined for the fifth consecutive quarter ending June 30, 2023. During the second quarter alone, FDIC-insured banks witnessed a nearly $100 billion drop in deposits.

Furthermore, the industry’s net income saw a $9 billion reduction to $70.80 billion in the second quarter, and the average net interest margin shrank by three basis points to 3.28%.

The perceived stability was also questioned merely two weeks after Moody's decided to downgrade the credit ratings of 10 mid-sized and smaller banks. Adding to the unease, bond rating agency Fitch has issued warnings, and subsequently, S&P Global Ratings cut the ratings of five American banks and put an extra two on alert, given the increasingly complex high-interest rate business climate.

Such a succession of downgrades from credit rating agencies could make obtaining loans more complex and costly for borrowers. Shares of the nation’s second-largest bank, Bank of America Corporation (BAC), suffered along with other bank stocks after Fitch’s warnings.

The Current Scenario

BAC has reported an increased number of its customers struggling with credit card payments, acknowledging that its credit card sector's performance lags behind expectations. Rising charge-off rates delineate this underperformance.

In the second quarter of 2023, the bank saw consumer net charge-offs hit $869 million, up from $571 million from the prior year quarter. Concurrently, provisions for losses remained steady at $1.1 billion.

A surge in the net charge-off rate and the delinquency rate of BAC's BA Master Credit Card Trust II were noted in August. Nevertheless, these rates are still below those recorded before 2019.

The net charge-off rate for the trust was 2.13% in August, up from 1.89% in July but significantly less than the 2.49% registered in August 2019. Likewise, BAC's delinquency rate escalated to 1.26% in August, slightly higher than July's figure of 1.24% but keeping under the 2019 benchmark of 1.57%. While these elevated rates might indicate stable consumer conditions, some may perceive them more pessimistically.

BAC's principal receivables outstanding were valued at $13.8 billion in August, suggesting a nominal shift in lending activity relative to the preceding month. Until recently, consumers were predominantly focused on clearing their credit card and other loan debts. However, current macroeconomic instabilities might put this trend into reverse.

The Real Picture

U.S. consumers have demonstrated robust financial activity throughout this year, with persistent spending expected to catalyze a third-quarter GDP growth of up to 3.5%. Harnessing the ability of credit cards and buy-now-pay-later (BNPL) services, consumers continue to shop. Despite various cost-saving efforts, current consumption patterns still surpass the average consumer's affordability.

Bank charge-offs and write-offs maintained a steady level until a shift occurred in July when the country's six major banking institutions disclosed the highest loan loss rates since the onset of the pandemic. Credit card repayments were disproportionately affected. Credit card loans constitute nearly 25% of BAC's total charge-offs.

These heightened charge-off rates signal potential challenges as more consumers default on their monthly payments. This trend is emerging in a financial landscape where consumers grapple with escalating costs and interest rates. Concurrently, wage stagnation lags behind inflation, and supplemental benefits have been reduced.

Current consumer spending reflects necessity instead of robustness. Consumers are compelled to spend more despite receiving marginally lower goods or services than before. Instances of arrears are recorded across multiple debt avenues, including credit cards, auto loans, mortgages, and student loans. The absence of immediate full payment has fostered a propensity toward overspending.

Unsustainable spending patterns may cause a downturn in consumer spending by early 2024, fueled by mounting credit card debts and dwindling pandemic-era surplus savings. The second quarter witnessed a 4.6% spike in consumer credit card debt, setting a record $1.03 trillion, as opposed to $986 billion in the first quarter.

As the burden of irrecoverable debt continues to strain lenders' financial stability, net charge-offs for BAC will keep rising.

Investors might want to consider the following additional factors:

Recent Developments

BAC has been imposed with staggering financial penalties in the recent past, totaling $250 million, following a series of dubious practices that include overdraft fee manipulation, withholding credit card rewards, and the initiation of unauthorized accounts. While this may have short-term impacts on its financial performance for the upcoming quarter, it is not expected to cause substantial overall financial implications.

Furthermore, the bank ended the second quarter incurring over $100 billion in paper losses due to its aggressive investment in U.S. government bonds. This figure significantly surpasses the unrealized bond market losses of BAC's competitors.

BAC's investments in technology are evidently paying off. Its digitization efforts have successfully translated into an unprecedented increase in Zelle transactions by more than double since June 2020, along with a digital banking adoption rate of 74% among households. Engaging customers via online and mobile transactions is significantly less costly for the bank than traditional in-person interactions.

Over the past three years, the financial institution has conscientiously refined and modernized its financial centers nationwide. This integral enhancement enables the bank to bolster its digital services and effectively cross-market various products.

By 2026, it envisages expanding its financial center network into nine emergent markets. In conclusion, its investments in technology are expected to bolster the bank's operating efficiency.

On August 29, BAC declared the introduction of its highly acclaimed Global Digital Disbursements platform to commercial clients who hold deposit accounts at the bank's Canadian branch.

With this innovative solution, users can process an array of B2C payments and C2B collections using the client's email address or mobile phone number as identifiers. This feature presents a cost-effective and user-friendly alternative for companies seeking to replace cash or cheque payments.

Robust Financials

For the second quarter ended June 30, 2023, BAC’s total revenue, net of interest expense, increased 11.1% year-over-year to $25.20 billion. Its net income applicable to common stockholders rose 19.7% year-over-year to $7.10 billion.

Additionally, its EPS came in at $0.88, representing an increase of 20.5% year-over-year. Also, its net interest income rose 13.8% over the prior-year quarter to $14.16 billion. In addition, its CET1 ratio came in at 11.6%, compared to 10.5% in the year-ago quarter.

Robust Growth

Over the past three and five years, BAC’s revenue grew at 8% and 2.5% CAGRs, respectively. Its net interest income for the same periods grew at CAGRs of 6.4% and 4.3%, respectively.

Net income and EPS grew at 13.6% and 18.8% over the past three years, whereas, over the past five years, these grew at 6.7% and 12.8%, respectively. The company’s total assets grew at 4.4% and 6.4% CAGRs over the past three and five years, respectively.

Mixed Valuation

In terms of forward non-GAAP P/E, BAC’s 8.67x is 4.4% lower than the 9.07x industry average. Likewise, its 0.87x forward Price/Book is 10.4% lower than the 0.97x industry average.

On the other hand, in terms of forward Price/Sales, BAC’s 2.32x is 2.1% higher than the 2.27x industry average.

Mixed Profitability

BAC’s trailing-12-month Return on Common Equity (ROCE) of 11.41% is 1% higher than the 11.30% industry average, whereas its trailing-12-month Return on Total Assets (ROTA) of 0.95% is 16.9% lower than the 1.15% industry average.

The stock’s trailing-12-month cash from operations of $44.64 billion is significantly higher than the industry average of $137.73 million.

Growing Institutional Ownership

BAC’s robust financial health and fundamental solidity make it an appealing investment opportunity for institutional investors. Notably, several institutions have recently modified their BAC stock holdings.

Institutions hold roughly 69.7% of BAC shares. Of the 2,816 institutional holders, 1,226 have increased their positions in the stock. Moreover, 139 institutions have taken new positions (42,890,796 shares).

Price Performance

The stock has declined 13.5% year-to-date to close the last trading session at $28.65. However, over the past year, it lost 17.4%, whereas over the past six months, it gained 3%.

Shares of BAC have been making lower highs for the past 12 months, but they have not made a low since March. Its share price displayed upward and downward movement multiple times from January to September 2023. The overall value so far declined compared to the beginning of the year.

Moreover, BAC’s stock is trading below its 100-day and 200-day moving averages of $29.19 and $30.7, respectively, indicating a downtrend.

However, Wall Street analysts expect the stock to reach $35.13 in the next 12 months, indicating a potential upside of 22.6%. The price target ranges from a low of $27 to a high of $49.

Mixed Analyst Estimates

For the fiscal year ending December 2023, analysts expect both BAC’s revenue and EPS to increase 6.3% year-over-year to $100.91 billion and $3.39, respectively. Its revenue and EPS for fiscal 2024 are expected to decline 0.8% and 4.2% year-over-year to $100.13 billion and $3.25, respectively.

Moreover, for the quarter ending September 2023, its revenue is expected to surge 2.5% year-over-year to $25.12 billion, whereas its EPS is expected to decline marginally year-over-year to $0.80.

Bottom Line

The recent upturn in bank charge-offs marks a return to normalcy for the industry after an unprecedented period of low levels during the pandemic, attributed largely to decreased unemployment and substantial government financial relief initiatives.

However, this surge in 2023 introduces an anomaly in the banking sector. Several banking institutions have acquiesced under pressure, and financial experts caution that should unemployment rise above 7%, the industry could face significant complications.

Moreover, consumers will face the reinstatement of student debt payments throughout the latter half of the year, as the forbearance period concludes in October. This would force customers to navigate difficult choices regarding credit card and student debt payments, potentially causing a broader impact on delinquency rates nationwide.

Major banks maintain a positive front that there is little cause for concern moving forward. However, this optimism may rely heavily on steady unemployment rates around the 5% mark - a contingency for which plenty of banks have pre-prepared provisions. Yet, if unemployment rates deteriorate further, banks and consumers could encounter hardship during the latter half of 2023.

Despite the adversities presented, BAC continues to display a robust capacity for growth amidst a tumultuous climate. Notably, despite a downshift in revenues and net income for its Global Wealth and Investment Management unit during the second quarter, the bank still surpassed Wall Street's top and bottom-line estimates.

Also, in the last reported quarter, when most finance firms recorded subdued Investment Banking business performance, BAC’s IB numbers were impressive. Its total IB fees of $1.21 billion increased 7.4% year-over-year, which boosted its global banking unit's net income by 76% to $2.7 billion.

Nevertheless, considering the bank’s tepid price momentum, mixed analyst estimates, valuation, and profitability, it could be wise to wait for a better entry point in the stock.