Strikes as Usual

Strikes as Usual

Strikes as Usual

Moneybox
Commentary about business and finance.
June 10 1998 5:21 PM

Strikes as Usual

When strikes become part of the normal course of events at a corporation, does that help labor or management? In some sense, that's the question being raised by the continued strife between the UAW and General Motors. The UAW walkout at GM's Flint Metal Center is now six days old, and the strike has shut down production at six GM assembly plants, idling more than 16,000 workers. Although the company and the union are in talks, there are no imminent signs of an accord, which at first glance seems fairly remarkable when you consider that a protracted strike would cost GM as much as $300 million a week in profit (not simply revenue). At second glance, though, the fact that GM's stock price has dropped barely two points in the week since the strike began suggests that the company is feeling no pressure from its shareholders to settle, while the company's stockpile of nearly $15 billion in cash gives it a comfortable cushion against any immediate fiscal pressures.

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The one-time charge
More to the point, analysts tend to write off strike-inflicted losses when evaluating the earnings of auto companies in particular, effectively dismissing them as one-time charges. So while GM feels the strike's effects on its bottom line, its share price is less likely to be hit hard. That's especially true in light of the bargain-basement price-earnings ratio of GM's stock, which is something like a third of that of the S&P 500. Even a significant cut in earnings, then, doesn't have anywhere near the impact on the share price that it would at companies like Gillette or Coke, which trade at P/Es greater than 40. (GM's P/E is around 6.)

Then again, Gillette and Coke don't have to contend with massive strikes that have the potential to shut down production lines across the country. The auto companies' relatively low market capitalizations are universally attributed to the fact that they are stuck in one of the most cyclical of industries. Car companies can't keep growing and growing because eventually a recession will hit, and when it does, auto sales are one of the first things to drop. At the same time, the sheer size of these companies makes dramatic growth only a pleasant memory. And in a stock market that places a premium on growth [see Moneybox for 6/2 on Intel and the death of dividends], that's a recipe for a lack of respect from investors.

The cost of doing business
It's plausible, though, that if General Motors--which has now faced seven strikes in the last year and a half and which two years ago lost $900 million as a result of a 17-day walkout at its Dayton, Ohio, parts plant--continues to be a UAW target, investors will start to treat the cost of strikes as a normal business expense. That would actually be bad news for GM, since instead of being dismissed as one-time charges, investors would treat strikes as consistent costs on a par with general & adminstrative expenses and advertising.

The paradox here is that to a certain extent labor presumably wants strikes to be non-normal events. In a way, GM's confidence that it can ride this thing out, and its constant reiteration that this will have no long-term consequences, must be disconcerting for the UAW, even though the pas de deux between company and union is now a decades-old reality of American industrial relations. If a strike isn't something dramatic, if it's seen as part of the normal course of events, then the UAW won't be able to get the publicity it wants and presumably needs, and it will also have a harder time motivating its workers for future walkouts. In some curious sense, then, both sides want a strike to be something out-of-the-ordinary, but they also want it to be something out-of-the-ordinary in a way that they can control.