BREAKING: UAW-GM Reaches Deal, More Coming from Valuentum Later… please note that this note was written prior to the deal announcement today. Valuentum will have more to say about the deal soon.
Image Shown: Shares of General Motors Company are beginning to recover as the company is reportedly getting closer to reaching a deal with the UAW, which would end a strike that is estimated to have cost the company over $1 billion according to some analysts.
By Callum Turcan
As the strike of ~46,000 United Automobile Workers (“UAW”) employees at US factories run by General Motors (GM) enters its second month, it looks like the chances for a breakthrough are growing. The Wall Street Journal reported that General Motors’ CEO Mary Barra met with officials from the UAW for the first time since the strike began this week, and that both sides are now much closer to reaching an agreement on key issues including how long it takes for most employees to reach the top pay tier. Shares of General Motors have recently begun to climb higher as the market is starting to factor in the chance that a deal will be reached relatively soon, thus ending the strike and enabling General Motors to get back to churning out automobiles in its most lucrative market.
We continue to like General Motors as a holding in our Best Ideas Newsletter and Dividend Growth Newsletter portfolios. Our fair value estimate for General Motors stands at $48 per share, and its adjusted Dividend Cushion ratio of 3.5x supports a nice dividend growth trajectory. Shares of GM yield 4.2% as of this writing. Here at Valuentum we love to get feedback from our members and appreciate the engagement. We recently received a question from one of our members relating to our October 7 piece covering the UAW strike at General Motors (which can be viewed here).
Question: “Thanks for the interesting view on GM. If the company is downgraded to non-investment grade by all 3 major rating agencies (as threatened) due to the UAW strike, would that change your view of the company given the >$60bn debt and >$40bn short term financing?”
Answer:Moody’s Corporation (MCO) notes that one of the crucial aspects of General Motors’ ongoing UAW contract negotiations, which would cover a four-year period, is that the company must preserve its hard-fought financial flexibility. General Motors brought in Mary Barra as CEO back in 2014 to pursue a significant restructuring of the company, which has already yielded massive cost savings. For those savings to continue (thus enhancing the firm’s expected future free cash flows), General Motors needs to maintain at least some wiggle room when everything’s said and done. That includes the ability to fundamental shift (i.e. change a transmission plant to a battery factory) production lines or close operations at factories that produce passenger cars, which aren’t in high demand in US markets, while shifting its production base towards electric vehicles (“EVs”), pickup trucks, and crossovers/SUVs.
Back in May 2019 before the strike began, Moody’s reaffirmed General Motors’ investment grade Baa3 senior unsecured credit rating. To maintain that rating, CEO Mary Barra needs to follow through with the restructuring program she kicked off roughly five years ago (with much success so far). We are supportive of her efforts and think that once the four-year contract is locked in, shares of General Motors could begin to converge towards their intrinsic value as a major headwind is put behind the firm.
Should UAW contract negotiations drag on for months and months, that would certainly change things especially if it appeared General Motors would be forced to agree to major concessions. However, we don’t see that as the base case scenario as things stand today and expect General Motors will maintain its investment grade credit ratings on the basis of its strong expected future free cash flows. We will continue to closely monitor this issue going forward.
BREAKING: UAW-GM Reaches Deal, More Coming from Valuentum Later… please note that this note was written prior to the deal announcement today. Valuentum will have more to say about the deal soon.
Auto Making Industry – F GM HOG HMC TSLA TM
Auto Specialty Retailers Industry – AAP AN AZO CPRT GPC KMX KAR MNRO ORLY PAG
Related: CARZ, ADRA, RXI
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Callum Turcan does not own shares in any of the securities mentioned above. General Motors Company (GM) is included in Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.