Sell ​​Ford stock now, ahead of labor talks, says Wells Fargo

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Add labor relations to challenges

Ford engine

in terms of electric vehicle prices, production and market share, not to mention the difficulty of selling cars as rising interest rates and inflation leave consumers with less purchasing power.

On Wednesday, Wells Fargo analyst Colin Langan added the automaker to the broker’s list of tactical ideas for the third quarter – a selection of stocks that the bank believes could be raised or lowered by significant events. expected in the next three months.

Langan said Ford (ticker: F) stock could be dragged lower as uncertainty mounts over the approach to negotiations between the automakers and the United Auto Workers. “We expect a contentious negotiation given new UAW leadership and high salary expectations,” Langan wrote. “A 10% salary increase is our base case scenario, which involves approximately $850 million in [incremental] costs.”

Wages are expected to rise because inflation is much higher today than it was in 2019, when the industry and the UAW last negotiated a contract. Inflation at the time hovered around 2% per year, but has averaged around 4.6% since the contract was signed. The average for the last 12 months is around 6.8%.

These changing rates will make it harder for both parties to know what is a good deal.

“UAW contracts expire Sept. 14 and one of the most important variables will likely be COLA,” or cost of living adjustment, Benchmark analyst Mike Ward wrote in an email Wednesday.

Workers at

Spirit AeroSystems

(SPR) has just signed a labor agreement which increases wages by around 6% per year on average for the next four years. The first year of salary increases will be almost 10%.

Rising costs can erode profit margins and lead to lower profits for automakers, including Ford.

At the same time, Langan said, prices for all cars, including electric vehicles, are expected to fall in response to high interest rates and tighter lending standards. They would take an additional hit if “broader macroeconomic weakness materializes,” he said.

All of this points to a decline in Ford’s stock price. Langan rates the stock as Sell and has a price target of $10, which is the lowest among analysts tracked by

set of facts
.

Ward is on the other end of the spectrum. He rates Buy stocks and has a price target of $20, the highest among analysts tracked by FactSet. The Benchmark analyst says Ford is a good bet because he expects earnings to be more stable than usual and because the stock is selling for less than nine times earnings per share.

Overall, 43% of analysts covering Ford rate the stock as Buy. The average buy odds ratio for stocks in the

S&P500
is about 55%. The average target for the price is around $14 per share.

Ford stock fell 0.7% in early trading after the call. THE

S&P500

And

Dow Jones Industrial Average
were both about 0.5%.

Write to Al Root at allen.root@dowjones.com