Publish date:

Ford May Outrun GM in Union Deal

Its stock could get a bigger boost from a new pact.
Author:

The labor negotiations are going on at

General Motors

(GM) - Get Report

, but in the end, the big stock gains may go to

Ford

(F) - Get Report

.

So says Bear Stearns analyst Peter Nesvold, who upgraded shares of Ford to outperform from peer perform Monday. He believes that GM's ongoing negotiations with the United Auto Workers over a new labor contract could result in a boost to Ford's bottom line if the two sides agree to create a union-controlled health care trust fund.

That outcome still isn't a certainty. The UAW's master labor contract with GM, the lead negotiator for Detroit's Big Three automakers, expired two days ago, and the threat of a strike hangs over the ongoing talks.

The

New York Times

TheStreet Recommends

reported that late on Sunday, the negotiations were in danger of faltering, and union leaders were considering choosing another automaker, such as Ford, as the lead negotiator. Still, on Monday the talks were resuming -- a sign that a deal between GM and the UAW is still possible.

For its part, Wall Street is anticipating a deal that would remove about $95 billion in retiree liabilities from the balance sheet of Detroit's Big Three automakers. Shares of GM recently were trading up 58 cents, or 1.7%, to $34.80, after they gained 15% last week as word spread that UAW President Ron Gettelfinger was open to creating a union-controlled trust fund, or a so-called VEBA, that would significantly unload these burdens.

Ford added only 5% last week, leading Nesvold to conclude that it's being overlooked.

"We think Ford shares overlook the fact that, under pattern bargaining, what goes to the lead negotiator also typically goes to

GM's Detroit counterparts -- Ford and Chrysler," wrote Nesvold in the report. "As a percentage of their current respective stock prices, the EPS benefit from a VEBA means as much, if not more, to Ford than GM, by our estimates."

Ford's auto business currently has about $40 billion in cash on its balance sheet, and investors expect the company to raise more funds through the expected sale of luxury brands such as Land Rover, Jaguar and Volvo.

"This should facilitate a VEBA funding," said Nesvold, and he also pointed out that "Ford's product cadence bottoms out this year and starts to improve in 2008."

Investors may be choosing GM as their bet on Detroit's labor negotiations because it's in better financial shape than Ford, but with so much pessimism baked into its stock price, the No. 2 U.S. automaker may be a better bargain at these prices. Both companies are still facing enormous headwinds in the marketplace as consumers rein in their spending habits amid a slowdown in the U.S. housing market.

Nesvold believes the best news is already behind at GM. It already posted earnings improvements, introduced new products and sold off assets, such as GMAC and Allison Transmission.

"Over recent months, GM's retail sales have generally missed expectations, while its use of incentives and daily rental fleet sales increased," said Nesvold. "GM's inventories, particularly in trucks, seem substantially too high. The incremental buyer of GM shares seems event-driven, not deep value oriented. As a result, we expect a material round of profit taking in GM by the time a new UAW contract is ratified."

Shares of Ford recently were up 11 cents, or 1.4%, to $8.14.