Analysts Doubt Advertised Savings in GM Deal

So General Motors Corp. (GM) negotiated a deal with the United Auto Workers that puts the union in charge of paying retiree medical bills, reversing the employer-pays model that has characterized American business for decades. The retiree health liability has hung like a dead weight on GM’s bottom line for years, and it has been one of the biggest threats to its long-term solvency.

Initial projections estimate the company will save US$3-billion a year with the move, narrowing the cost gap that separates it from Asian-based automakers like Toyota Motor.

Is this a big deal? Yes. But how big a deal remains to be seen.

A whole whack of details about the agreement have not been made public. And some analysts have begun to doubt that the savings will really be as much as advertised.

The last GM-union deal on post-employment benefits promised US$3-billion in annual savings but only delivered US$500-million, Goldman Sachs analyst Robert Barry said in a note Thursday. Plus, GM could still be forced to backstop the liability under certain conditions, which would leave it exposed to healthcare inflation.

Looking at GM’s overall business, Mr. Barry said there are some major risks that make it a stock to stay away from for the time being. He rates it “neutral” with a 3-month price target of US$37.

“As novel as the new contract appears to be on costs, we do not see it as transformative,” he said. “Severe volume, mix and pricing headwinds continue to weigh on the revenue outlook.” GM has made sizable progress on product design and quality in recent years, but still has a lot left to do, the analyst said.

UBS Securities analyst Rob Hinchliffe echoed Mr. Barry’s view. “The contract looks to give GM better cash flow and flexibility, but does not fix its cost gap,” he wrote.

He estimates GM will save US$1.2-billion in cash annually with the health care deal. That’s not peanuts. But it doesn’t look like a life-saving number either.

Comments

[ex GM emp]

The analysts can't figure it out because they're number crunchers. They don't know how the plant workforce evolves over time. Example:
After many years on the line, some assembly line workers whose bodies were shot would transfer to the janitor crew where they would work until they retired and continue to make a comparable wage. Now those jobs are no longer available (non core, paying 14 bucks an hour.) Now what do the broken down assembly line workers do? They retire. Their health care is off the books, their pension is out of the pension fund and their replacement is in with less money a 401k (no pension) and reduced health benefits. I guess you guys are short the stock.