Some more bad news… for some. The U.S. auto sales figures were released today and the score card clearly shows Japan is winning. There’s still plenty of profit opportunity left in U.S. auto stocks, though; it’s a simple case of follow the leader. Let me explain.
Led by General Motors (GM:NYSE), the U.S. auto industry looks poised for a rebound.
GM was the first major auto manufacturer to go through the minefield of negotiations with the United Auto Workers union (UAW).
GM successfully hammered out a deal with the UAW that would allow many of its workers to take early retirements in exchange for large lump-sum bonuses. To date, 34,400 GM employees have opted for the deal. As a result, GM’s future pension liabilities have been pared down to $85 billion from $89 billion. It doesn’t sound like much, but it’s a start.
GM’s not out of the woods yet. The company is currently working out its liabilities to its former employees at currently Chapter 11 Delphi Automotive (DPHIQ:OTC PinkSheet), considering a strategic agreement with competitors Nissan and Renault, and is looking to sell another larger portion of its financing division, GMAC.
So far Wall Street likes what it sees and GM’s stock has already climbed 68% during the last seven months. The catalyst for the stunning jump was the completion of the agreement between the UAW and Ford. After that, GM’s leadership could get back to business.
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Expectations are getting high for GM, but Ford (F:NYSE) is facing the same situation that GM was facing six months ago.
It’s currently in negotiations with the UAW and the UAW looks like it’s willing to give in to Ford. GM got a so-so deal out of the powerful labor union. Ford is looking at the realistic prospect of getting a much better deal from the UAW.
Recently, the vice president in charge of UAW negotiations with Ford stated, “We understand the crisis at Ford. We have to be far more aggressive in finding a solution."
This is the public side of the UAW-Ford negotiation. I’m sure there weren’t too many statements like this crossing the negotiation table.
You see, Ford isn’t in nearly as good shape as GM was when it sat down with UAW leaders. Ford hasn’t been unloading debt from its financing division in high-profile multibillion-dollar deals. It has touted its extensive future medical and retirement packages.
It’s been doing the small things to get itself turned around: It expects to lay off 30,000 workers (12,000 by the end of 2006), close 14 plants, and pile $1 billion of investment capital into upgrading its factories. Ford will also be accelerating its new vehicle development programs and release dates.
Granted, the U.S. auto industry is still a mess. Following a couple years of aggressive price reductions to keep sales up, many investors are left wondering how many buyers for new cars remain.
After the July auto sales report released today, GM’s still No. 1 in terms of car sales, but Toyota is No. 2, and Honda’s moved up another notch to No. 3. The U.S. auto manufacturers experienced a 17% decline in sales while the Japanese manufacturers achieved 1.7% growth in sales. Ford led the pack downward with a decline in sales of more than 35%.
Despite this, Ford simply needs to get past the UAW hurdle and it’ll be on its way.
In this highly cyclical industry, it’s best and also most nerve-racking to play the turnaround companies. As Ford’s stock price teeters near its 52-week low, the trading opportunity looks very appealing. A quick turnaround and some movement along its own set of restructuring plans will assist this beaten down stock tremendously.
After all, once GM sorted out its UAW contracts, the stock climbed steadily. Ford is now about to close the books on its labor agreement with UAW.
I know it sounds crazy, but you should consider picking Ford as the company follows in GM’s footsteps. This is a classic leader/laggard play when the laggard, Ford’s stock, will be closing the gap against GM. Play the laggard in this one.
Enjoy your day.
Andrew Mickey
Editor, Fear and Greed
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