The Wall Street Journal - 21.10.2019

B10| Monday, October 21, 2019 THE WALL STREET JOURNAL.

UAW Deal

Turns High

Beams On

GM’s Plans

Assurances needed on

cost-savings targets

GeneralMotorsshareprice

Source: FactSet

$41

33

34

35

36

37

38

39

40

Aug. Sept

Strike begins

Oct.

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

U.S.marketsharebytotal

consumerspending

Source: Edison Trends

40

10

15

20

25

30

35

%

2018 ’19

DoorDash

UberEats

Grubhub

Given its history, the company hasn’t been shy about scenario planning.

HARRISON MCCLARY/REUTERS

clude Chesapeake Energy

Corp., which has fallen more

than 70% over the past 12

months, and Whiting Petro-

leum Corp., which has lost

more than 80%. Of 73 U.S.-

based exploration-and-produc-

tion companies tracked by The

Wall Street Journal, more

than 40 have lost at least half

of their stock market value in

that time.

Bonds issued by energy

companies have also been hit

hard. The average extra yield,

or spread, that investors de-

mand to hold energy bonds

has climbed to roughly 7.2

percentage points, according

to Bloomberg Barclays data,

from a recent low of 5.2 per-

centage points in mid-April.

A California Resources

Corp. bond due in 2022 has

fallen to roughly 46 cents

from 75 cents at the end of

2018, according to Market-

Axess.

And bonds due in 2024

from EP Energy Corp ., which

filed for bankruptcy earlier

this month, recently traded at

around 3 cents on the dollar,

down from 50 cents earlier in

the year.

Oil futures snapped a two-

FactSet expect the company to de-

liver net income of just $2 million

in what is a seasonally weak third

quarter, down more than 90%

year-over-year.

It could get worse. Grubhub and

its competitors have lately caught

regulators’ attention for the steep

cuts they charge restaurant cus-

tomers in key places such as New

York City. There, the City Council’s

small-business committee is con-

sidering a cap on commission fees

that could disproportionately

weigh on Grubhub’s bottom line

given that it is the largest delivery

platform in New York City by far.

Second Measure data from August

shows Grubhub handles 71% of

third-party delivery sales in that

market.

As the only publicly traded pure

play in the industry, Grubhub’s

shares are a barometer of the mar-

ket’s views on the economics of

food delivery. Clearly they reflect

doubts even as the business has

grown overall. They will likely con-

tinue to do so until Grubhub and

its competitors can master a more

palatable recipe for profitability

and growth.

—Laura Forman

For now, General Motors can
afford its generous deal with the
United Auto Workers Union just
fine. The bigger question is what
happens when sales slide. Chief
Executive Mary Barra has some re-
assuring to do when the largest
U.S. auto maker reports third-
quarter results later in October.
Late Thursday, the UAW pub-
lished details of the deal it has
sent to its members for approval.
It includes some important wins
for the union, particularly on be-
half of more recent hires, who will
reach the top wage twice as
quickly as before, and staff on tem-
porary contracts, who have a faster
route to getting permanent ones.
There are also 3% wage increases
in two of the four years covered by
the agreement, with 4% bonuses in
the other two. Most staff will get
an $11,000 signing bonus.
Has GM given up its prized flex-
ibility to get staff back to work?
Joseph Spak at brokerage RBC ex-
pects the wage deal to add roughly
$100 million to GM’s annual costs,
with an additional $485 million hit
from the signing bonus spread
over four years.
Without knowing what wage in-
flation the auto maker factored
into its planning, though, investors
have no sure way of modeling the
deal’s impact on future profits.
These will depend in part on the
$4.5 billion cost-savings target GM
announced in November. Impor-
tantly, the deal still allows the
company to close three of the four
plants it moved to “unallocate” at
that time, and the fourth plant will

get an electric pickup truck that it

needed to build anyway.

The company’s own guidance

will be key. Any updated cost-sav-

ings target—rather than the one-

time cost of the continuing strike

itself, estimated by some analysts

at more than $2 billion—will be

the most important number to

watch in GM’s results.

Whatever the impact, it isn’t go-

ing to hurt GM much right now. In

previous eras, investors rightly

worried that expensive union pack-

ages made U.S. auto makers un-

competitive relative to nonunion-

ized Japanese and European peers.

Now, though, GM mainly competes

with its unionized Detroit peers in

the segments that matter most to

profits: U.S. pickup trucks and

sport-utility vehicles. Given that its

deal with the UAW will be a tem-

plate for similar deals at Ford and

Chrysler, it is pushing up costs for

its key rivals too. And for now, U.S.

consumers seem happy to pay

more for their wheels, helped by

generous financing terms.

The real worry is what happens

when the sales environment sours.

Given its history of bankruptcy,

GM hasn’t been shy about scenario

planning. Chief Financial Officer

Dhivya Suryadevara said at a JP-

Morgan conference in August that

a 25% decline in U.S. car sales

would hit GM’s operating profits

by 60% to 70%, including a shift in

demand in favor of cheaper, less-

profitable vehicles. Free cash flow

would break even, excluding a

likely $5 billion unwinding of

working capital that would have to

be funded from the company’s $18

billion cash pile.

How will these numbers be af-

fected by the UAW deal? The

agreement didn’t contain strong

assurances for workers on job se-

curity, which may help mitigate

the impact. If GM can make a con-

vincing case that its cost targets

and downturn planning are robust,

even after the UAW deal, investors

will conclude that it got off lightly.

—Stephen Wilmot

News flash: Making money sud-

denly matters in tech. That is bad

news for any company competing

in a sector filled with rivals des-

perate to gain scale, such as food

delivery, and could leave Grubhub

investors with a bitter aftertaste.

Venture capitalists have, in a

matter of months, gone from

trumpeting growth at all costs to

evangelizing a new ethos that in-

cludes terms such as “discipline,”

“unit economics” and, perhaps

most important, “profitability.”

The sharp change in tune has

come in the midst of an icy recep-

tion from public investors to cash-

burning companies like Uber , Lyft ,

WeWork and Peloton , which were

all hotly anticipated by public in-

vestors just months ago.

Grubhub has shed 53% of its

market value over the past year

and 26% over the past three

months alone. Those losses have

come as a direct result of competi-

tors’ growth.

Earlier this month, Edison

Trends released data showing

Grubhub’s commanding market

share lead has been cannibalized

over the past 18 months by Uber

Eats and the new market leader,

DoorDash , which led Grubhub by

11 percentage points of market

share as of September.

While losing its stranglehold on

the market, Grubhub also has be-

come less profitable. Net income

fell from $54 million in the fourth

quarter of 2017 to a loss of $5 mil-

lion during the same period of

2018, according to FactSet, mark-

ing Grubhub’s first net loss as a

public company.

And while the company said af-

ter its first-quarter report this

year that it would be disciplined

about spending despite heavy com-

petition, profits haven’t exactly

come roaring back. Not only does

Grubhub appear to have lost mar-

ket share over the past few

months, but analysts polled by

Grubhub Pain Could

Chill Delivery Hype

MARKETS

week losing streak on Oct. 11

after trade talks between the

U.S. and China seemed to

progress and an Iranian

tanker near the Saudi Arabian

coast was damaged in what

some believe was a deliberate

attack. However, prices have

slipped since then, with U.S.

crude falling 1.68% to end last

week at $53.78 a barrel, and

Brent, the global gauge, falling

1.8% to $59.42 a barrel.

To some investors, it seems

like nothing can stem the de-

clines. After attacks on Saudi

Arabian oil facilities wiped

out 5% of global output last

month, oil prices spiked 15%.

They quickly returned to pre-

attack levels, driven by wa-

gers that wavering demand

and steady U.S. production

would more than make up any

dearth of supply.

Highlighting the ability of

U.S. shale producers to put

out plenty of oil, U.S. crude

stockpiles climbed by 9.3 mil-

lion barrels during the week

ending Oct. 11, a fifth straight

week of increases, according

to the U.S. Energy Information

Administration.

The Organization of the Pe-

troleum Exporting Countries

is considering deeper output

cuts ahead of its December

meeting, with OPEC Secretary-

General Mohammed Barkindo

saying recently that the cartel

and its allies would make

“strong, positive decisions” to

sustain oil prices.

But Mark Benigno, co-di-

rector of energy trading at

INTL FCStone, likened oil

prices to a weighted-down

balloon.

“Every time they try to get

off the ground, they just come

right back down,” he said.

—Sam Goldfarb

contributed to this article.

Bets on rising U.S. oil
prices have hit a nine-month
low, underscoring investors’
concerns that a slowing econ-
omy will dent demand for
crude at a time when the
world is awash in oil.
The number of contracts
wagering on an increase in
U.S. crude prices outnumbered
bearish ones by 86,530 during
the week ended Oct. 15, ac-
cording to the U.S. Commodity
Futures Trading Commission.
That put net bullish bets at
their lowest level since the
week ended Jan. 8.
It was the latest indicator
that softening demand and
strong production from the
U.S. and other suppliers are
souring investors’ outlook on
crude. The International En-
ergy Agency recently cut its
2019 and 2020 oil-demand
forecasts, citing a lower out-
look for growth, while down-
beat manufacturing numbers
from around the world and
trade uncertainties keep a lid
on oil prices, despite escalat-
ing tensions in the Middle
East that could threaten sup-
ply.
“Demand is the major ob-
stacle here,” said Greg Share-
now, portfolio manager at
Pimco. In order for sentiment
to turn around, investors need
to see better trade data
emerge or find other reasons
to believe demand will im-
prove, he said.
The pessimism has hit
stocks and bonds from the oil
patch. Shares and bonds is-
sued by exploration-and-pro-
duction companies and oil-
field-service firms have
slumped as heavy spending
and faltering prices for oil and
natural gas have hit profits.
The SPDR S&P Oil & Gas
Exploration & Production ex-
change-traded fund has lost
around half of its value in the
past year, while the PHLX Oil
Service Index , a basket of 15
companies that help oil pro-
ducers unearth oil and gas,
has fallen more than 50% over
the same period.
The biggest decliners in-

BYSARAHTOY

Demand Worries Dent Investors’ Outlook on Oil

Source: U.S. Commodity Futures Trading Commission (bets); FactSet (price); U.S. Energy Information Administration (supply)

300,000 contracts

0

50,000

100,000

150,000

200,000

250,000

Jan. April July Oct.

Netbetsonhighercrude-oilprices

recentlyhitanine-monthlowas

investorsanticipatewaningdemand

amidstrongsupply.

86,530

Weeklynetbullishbets

onU.S.crude

9-monthlow

U.S.crude-oilprice

$70

40

45

50

55

60

65

a barrel

Jan. Oct.

U.S.crudestockpiles,changefroma

weekearlier

10

–15

–10

–5

0

5

million barrels

Jan. Oct.

To some investors, it

seems like nothing

canstemthe

declines in prices.