Deutsche Bank analyst Rod Lache says unions appear to be more open to "unconventional solutions" for the automakers' medical-cost woes
Ford Motor Co. (F) and General Motors Corp. (GM) are struggling to pay their employees' health-care costs as sales languish. While the two automakers battle it out with unions, Deutsche Bank sees higher odds that some in the industry could hammer out solutions this year. Analyst Rod Lache upgraded the firm's opinions on both companies to buy from hold.
The United Steelworkers Union recently offered Goodyear Tire & Rubber Co. (GT) a deal that effectively got it out of the retiree healthcare insurance business, Lache said in a research note. Deutsche thinks that union has offered a similar deal to GM; while that was turned down, at least one or more U.S. automakers will pursue such offers. "Unions are increasingly open to unconventional solutions," Lache wrote in a research note dated Feb. 8.
Investors bid up GM's stock by 5.6% to $35.68 per share in afternoon trading on the New York Stock Exchange on Feb. 9. Ford's shares rose 2.1% to $8.73 per share.
Right now both GM and Ford are choking underneath their health care bills. Lache forecasts that GM's healthcare expenses will rise to $7.4 billion by 2011 from $5.9 billion in 2006, while Ford's will go to $4 billion from $2.9 billion during the same time period. Solving this problem, Lache says, would give the companies more financial flexibility as they try to reorganize and become more profitable.
Lache says Deutsche's analysis suggests that GM's pension overfunding could increase to $29 billion by 2011, from $17 billion currently. He figures the pension law passed in 2006 should allow the automaker to funnel some of the surplus toward funding retiree healthcare. "Using the pension as a funding source should increase the value for shareholders.
Deutsche's 12-month price target on GM is now $45 – but it believes "it could be a $68 stock by 2011." The firm believes Ford could reach $12.75 in 2009, which "implies $11 in 2008."
The UAW, which represents autoworkers, did not respond to a request for an interview within press time.
(Deutsche Bank does business with companies covered in its research reports.)