Workers reject labor contract

General Electric (GE) experienced a setback on July 10 after its workers at the GE Aviation Lynn facility rejected the company’s newly proposed four-year labor contract. On Wednesday, members of the International Union of Electric Workers (or IUE) Local 201, which represents thousands of GE workers, voted down the labor contract due to various shortcomings.

Lynn Plant Workers Surprise GE with Rejection of Labor Deal

The local labor union pointed out several issues with the new contract, including a cut in pension benefits for new employees, a cut in retirement benefits, and health care cost coverages. Yesterday, the IUE released a statement that said workers should “prepare for a strike,” according to the Times Union, an American daily newspaper.

In a Facebook post, the IUE Local 201 wrote, “We are preparing for a nationwide strike of all IUE-CWA GE Conference Board locals.” The post further reads, “For now, report to work as usual and prepare for a strike,” Times Union reported.

The majority of IUE members were in favor of the new contract. According to IUE’s statement, about 53.2% of members voted in favor, while 46.8% were against it. However, the union group’s rule counts the vote on a location basis. For example, if the majority of members at a site vote against the deal, then it means the vote of entire local members will be counted as no. On that basis, it was found about 55.7% have voted against the deal.

GE’s Lynn plant has approximately 2,600 employees, which make up about 40% of GE Aviation’s 6,600 workers covered under the union rule. The local union argued that GE Aviation is the highest grossing and most profitable business unit of the industrial conglomerate despite its other divisions, including the Power segment, which has been struggling for the last few years. Therefore, the union wants management to consider what value they add to the company and compensate accordingly.

GE has won a multi-billion dollar contract from the US Army, which has chosen the industrial conglomerate’s engines for its helicopters. The majority of the required engines are to be built at GE Aviation’s Lynn plant, and the contract would give the facility significant work for decades.

Furthermore, CFM International, a 50-50 joint venture between GE Aviation and France’s Safran Aircraft Engines, wrapped up $55 billion worth of engine contracts last month at the Paris Air Show. These mega multi-billion new deals promise long-term secured work for GE Aviation facilities.

Rejection surprised management

The refusal came as a surprise for GE’s management, as it had reached a tentative agreement with the IUE last month. However, the deal needed further approval from workers in local chapters of the union.

In its July 10 statement, GE said, “Today, the IUE-CWA informed GE that although a majority of its members approved the four-year national labor contract, its Conference Board Rules resulted in the proposed agreement being turned down.” The statement continued, “We strongly believe the contract is a good package for employees, and a majority approval vote of IUE-CWA membership reflects that.”

The new four-year labor contract proposes an increase in hourly wages and a $1,500 ratification bonus. The deal, however, had included a rise in health care deductibles, which is believed to be the most unpleasant thing for workers.

GE’s previous labor contract with its Aviation business unit has already expired on June 23. Therefore, the rejection of the new deal has increased the risk of a possible strike at its Aviation facilities. The company’s union workers haven’t gone on strike in the past 50 years. Before this, over 150,000 union workers went on strike for 102 days in 1969. However, currently, the nationwide unionized workforce at GE facilities has remained under 7,000.

Stock performance

GE stock has gained solid momentum since the beginning of 2019 and has risen 40%. The stock has outperformed all the major US indexes, including the Dow Jones, the S&P 500, and the NASDAQ, which are up 15.1%, 19.4%, and 24.9%, respectively, YTD.

GE has also outpaced the gains of the Industrial Select Sector SPDR ETF’s (XLI) returns, whose portfolio consists of S&P 500-listed industrial stocks. The ETF has gained 18.8%. The YTD returns of the majority of its peers have remained much lower. Honeywell International (HON), United Technologies (UTX), and Caterpillar (CAT) are up 32%, 22.5%, and 4.4%, respectively, YTD.

After falling throughout last year and reaching its ten-year low of $6.40 on December 11, GE stock has made a sharp turnaround this year. It seems investors have gained solid confidence in the stock after CEO Larry Culp’s quick and impressive action to turn around the business and strengthen the balance sheet.

The most notable initiatives undertaken by Culp included reducing GE’s stake in Baker Hughes (BHGE), divesting the healthcare equipment portfolio, and revising the spin-merger deal with Wabtec in a more lucrative manner. The company, during its fourth-quarter 2018 results, stated that the strategies mentioned above along with a dividend cut, helped it save $10 billion in cash during the quarter.

Additionally, Culp found a buyer for the BioPharma business unit in the first quarter. Danaher (DHR) has agreed to buy the business asset for $21.4 billion, which would help GE reduce its debt significantly.

Analysts’ view

Wall Street analysts have provided a consensus “hold” recommendation on GE. Five of the 19 analysts covering the stock have given it a “strong buy” recommendation, four provided a “buy” rating, seven have a “hold” stance, one gave it a “sell” recommendation, and the remaining two give it a “strong sell” recommendation. Analysts’ average target price of $12.69 on the stock reflects 24.4% upside potential over the next year.

Most recently on July 9, William Blair analyst Nicholas Heymann reiterated his outperform rating on the stock and said that the company could once again surprise with its impressive second-quarter results, just like it did in the first quarter.

He believes that investors’ confidence in GE stock could improve further with better quarterly numbers and improvement in liquidity. His target price on the stock ranges between $14 and $16, which reflects a return of 37% to 57% over the next year.

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