What happened
It's Wednesday, the day after the stock market's big 4% one-day decline -- and the good news is that stocks are healing today. While not all of yesterday's damage has come undone, the S&P 500 is up about one-third of a percent, and the Nasdaq is up about 0.5%, since yesterday's close.
But not all the news is good. Over at General Electric (GE -2.21%), that bellwether of industry, shares are still sliding for a second straight day -- down 2.1% as of 10:10 a.m. ET.
So what
So what is dragging GE stock down today? The answer's not obvious, but here's one possibility: GE's union is getting antsy, demanding higher wages, and it appears GE is ready to play ball. As the Boston Business Journal reported midday yesterday, GE Aviation has reached a "tentative" agreement with the IUE-CWA Local 201 labor union at its plant in the Lynn suburb of Boston that could result in workers earning higher wages.
The new agreement, if approved in a union vote on Sept. 21, will reduce from 10 or more to just six the number of years it will take for a union member at Lynn to climb from the bottom of GE's pay scale to the top -- raising overall wages at the plant. And granted, right now this change will affect only 2,600 GE workers, but the union's local president insists that IUE-CWA is "not stopping here" but hoping to use the Lynn agreement as the basis for a "national union contract for GE workers across the country."
Now what
So how big a deal is this for GE? Well, first of all you need to know which GE you're talking about. General Electric, after all, is in the process of splitting into three different companies. The one we're talking about today is GE Aviation, soon to be known as GE Aerospace, and it's a $21.3 billion-a-year business with about 40,000 employees, according to information from Datanyze -- so for now, this labor agreement will probably affect only about 6.5% of the workforce, but that number could grow over time.
As wages rise at GE Aviation, the division's current 18.2% operating profit margin -- which, according to data from S&P Global Market Intelligence, is currently the unified GE's healthiest -- could erode, and that would diminish the value of a stand-alone GE Aerospace.
Should this happen, it would make both GE Aerospace, and for the time being GE as a whole, less valuable to investors. Presumably this is the reason investors are selling off GE stock modestly this morning. That said, the division is still GE's most profitable, and biggest in terms of revenues as well. So while I see a risk in this development, I still think investors are best advised to take a wait-and-see approach here.
Wait and see how much GE Aerospace sells for when it becomes independent. Wait and see how profitable the new company is after the spinoff and the wage scale change. Only then can you make a truly informed decision as to whether GE Aerospace is a buy or a sell.
