Upgrades and Downgrades: the Automotive Edition

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Wall Street takes carmakers for a test drive
Tuesday was a busy day on Wall Street, at least if you have any interest at all in automotive stocks. On the one hand, analysts at Deutsche Bank removed their "buy" rating from Honda Motor (NYSE: HMC  ) , while on the other hand, Zacks Research upped its rating for rival Ford (NYSE: F  ) to "neutral."

Meanwhile, far removed from the world's major automotive capitals, Tesla's (Nasdaq: TSLA  ) admission that no, Virginia, there is no Santa Claus -- and no chance at all that Tesla will be building 5,000 cars this year -- garnered a 10% sell-off in the stock, and a nasty note from Goldman Sachs. Let's take those one at a time.

Hating on Honda
Citing limited upside to a stock now costing $32 and change (and more importantly, nearly 15 times earnings), analysts at Deutsche Bank cited a trifecta of woes when downgrading Honda yesterday. These ranged from a cost of production that is too high to profits expectations that are too optimistic, despite "softer earnings potential" in the year ahead.

Deutsche still thinks Honda's "dividend yield above 3%" makes the stock worth holding on to, mind you. But, apparently, that's really the only plus left in the stock. (And if you ask me, a pretty weak plus at that. If it's Japanese car company dividends you seek, Nissan pays a 3.7% dividend yield... and earns a net profit margin nearly twice that of Honda.)

Driving Ford out of a ditch
Meanwhile, on this side of the Pacific, local analysts at Zacks Research are feeling guardedly optimistic about the prospects for Ford. As reported by Analyst Ratings Network yesterday, the Chicago research shop has removed its "underperform" rating on Ford stock, and upgraded it to "neutral," with an $11 price target implying a modest 8% profit from today's prices.

It's not hard to find things to like about Ford. First and foremost, the P/E ratio, which now sits at a drool-inducing 2.3 times earnings. Earnings may slump next year, but even if they do, Ford's forward P/E ratio is still less than seven, and enticingly cheap if you think the company can hit the consensus estimate of 10% long-term-earnings growth.

Sure, actual free cash flow at the company is less than the earnings Ford claims. Even so, the $5 billion in cash profit that Ford generated over the past year is enough to give the stock a price to free cash flow ratio of less than eight -- more expensive-looking than either Ford's trailing or forward P/E ratios, but still plenty cheap to buy.

Is Tesla toast?
Last and least, we come to Tesla -- the little auto company that couldn't quite fulfill its 5,000-cars-by-the-end-of-the-year promise yesterday. On Tuesday, CEO Elon Musk admitted that with only 255 cars built to-date, Tesla's probably going to top out at fewer than 3,000 cars delivered this year, with revenues coming in as much as a third below its goal -- perhaps only $400 million.

Granted, management promises to do better next year, saying it will "exceed our objective of 20,000 Model S deliveries in 2013." And one analyst, at least, commended the firm for choosing to "delay production than compromise on quality." Still, Goldman Sachs lamented Tesla's "surprise," and cut its price target on the stock by $6 to $42 after Tesla confirmed plans to sell 5 million more shares -- diluting existing shareholders in order to raise more capital.

It wasn't all bad news. Among other revelations in yesterday's announcement, the company advised that it hopes "to achieve a gross margin of 25% in 2013" on its cars. This lends some comfort to investors (such as yours Fool-y), who've wondered how profitable the cars will be for Tesla once they're built. For context, if Tesla can earn a 25% gross margin on its wares, that would be nearly twice the low-to-mid-teens margins General Motors (NYSE: GM  ) and Ford both earn. It suggests that rather than just moving metal (and aluminum, at that), Tesla may be able to generate some serious coin from its cars.

Foolish final thought
At least, let's hope so. One final thought about Tesla -- largely ignored by the media this week -- needs to be voiced before we wrap up, and this concerns not Tesla per se, but its partner in the "electric Rav4" project: Toyota (NYSE: TM  ) .

When Toyota announced in 2010 that it was taking a stake in Tesla, and hiring the company to build an electric engine for its new electro-SUV, it seemed Tesla had found an alternate route to get money flowing into its coffers. Unfortunately, Toyota threw cold water on that idea this week. Confirming that it expects to count its pure electric vehicle sales in the hundreds -- 100 subcompact eQs, and fewer than 900 electric Rav4s per year -- Toyota made its biggest bet on hybrids, announcing a plan to field 21 different hybrid models over the next three years.

Ah, well. On the plus side, at least this will give Tesla more time to build its own cars. And speaking of time, if you want to spend a little of it learning about these car companies, and what makes them tick, get a hold of our new premium research on Ford. Ford has been performing incredibly well as a company over the past few years -- it's making good vehicles, is consistently profitable, recently reinstated its dividend, and has done a remarkable job paying down its debt. But Ford's stock seems stuck in neutral. Does this create an incredible buying opportunity, or are there hidden risks with the stock that investors need to know about? To answer that, one of our top equity analysts has compiled a premium research report with in-depth analysis on whether Ford is a buy right now, and why. Simply click here to get instant access to this premium report.

Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 288 out of more than 180,000 members. The Motley Fool has a disclosure policy.

The Motley Fool owns shares of Tesla Motors and Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor, Tesla Motors, and General Motors. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 27, 2012, at 5:23 PM, nonqual wrote:

    “Among other revelations in yesterday's announcement, the company advised that it hopes "to achieve a gross margin of 25% in 2013" on its cars. This lends some comfort to investors (such as yours Fool-y), who've wondered how profitable the cars will be for Tesla once they're built.”

    Where have you been? Musk has been pedaling the 25% GM “aspiration” for the last eighteen months. It used to be coupled with his claims that Telsa would deliver 5.000 to 7,000 Model S’s in 2012. Musk is either clueless or dishonest when it comes to gross margin. In an interview several weeks ago, Musk claimed GM for the Roadster was between “ 25=30%” the SEC filings show it was less than 15%. The Model S is a larger vehicle, with a bigger battery, and more features and it is going to sell for approximately half the Roadster. Go figure.

    Do you see any difference between "to achieve a gross margin of 25% IN 2013" and "to achieve a gross margin of 25% FOR 2013"? Does it make any difference in your analysis of what TSLA shares are worth? Voting time is over; it’s weighing time now.

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