Unions have always played a significant role in shaping the American labor landscape despite a decline in private industry unionization rates. The United Auto Workers (UAW) is among the largest unions in the US, representing over 400,000 active members and 580,000 retired members. Currently, around 13,000 UAW members are on strike, with a focus on the “Big Three” automakers – Ford, General Motors (GM), and Stellantis (STLA).
While negotiations progress between Ford and the UAW, the situation remains more challenging for General Motors and Stellantis. The union recently announced an expansion of the strike to 38 locations across 20 states, involving an additional 5,600 employees from the Big Three.
This article focuses on automotive retailers who sell vehicles produced by manufacturers to consumers. Two such companies that are likely to benefit the most and withstand the effects of potential strikes are AutoNation (NYSE:AN) and Lithia Motors (NYSE:LAD).
Avoiding the Pain
Estimating the current impact of the strikes on automotive production is difficult, but prolonged strikes could worsen the situation significantly. To identify retailers that can weather the storm, we should consider those with large inventories of new and used vehicles.
Among the companies mentioned, Asbury Automotive Group, AutoNation, and Lithia Motors have a higher exposure to the Big Three. However, the availability of alternative vehicle options and price increases due to the strike may push consumers towards other brands. This underlines the importance of having significant inventories of the affected vehicles to sustain business during the strike.
Among the retailers, Lithia Motors stands out with its substantial inventory of both new and used vehicles. Conversely, Group 1 Automotive has lower exposure and inventory levels. AutoNation also proves to be a compelling prospect due to its robust parts and services operation that can thrive even if more used vehicles are sold or existing ones are kept longer.
Parts and Services as a Resilient Revenue Stream
In addition to vehicle sales, automotive retailers generate revenue through parts and services. AutoNation, in particular, excels in this area, with $2.24 billion in revenue attributed to these activities during the first half of the 2023 fiscal year. Parts and services exhibit high-profit margins compared to vehicle sales, making it a vital aspect of profitability for these companies.
The increasing average age of vehicles on the road in the US indicates that consumers may choose to hold onto their vehicles for longer periods during a strike. This translates to a higher demand for maintenance and repair services, further benefiting retailers like AutoNation.
Considerations and Opportunities
While uncertainty prevails, this situation may present compelling opportunities. Retailers like Lithia Motors, with significant inventories, are poised to benefit from potential price increases and competitor inventory issues. AutoNation’s focus on parts and services provides resilience if the strike leads to increased demand for used vehicles or longer ownership periods.
Nevertheless, a prolonged strike may alter the landscape, potentially resulting in declining revenue as inventories deplete. Increased production from other manufacturers may not be enough to offset losses. It’s crucial to acknowledge the risks associated with investing in this sector under such circumstances.