This Just In: Deutsche Bank Says It's Time to Buy Ford Motor Company

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." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.

But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our supercomputer tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.


Is Ford stock about to head downhill? Photo: Ford Motor

And speaking of the best...
As the Nasdaq and Dow wobble in early trading Friday, one stock showing a pronounced and steady uptrend is Ford (NYSE: F  ) . For this, you can thank the friendly analysts at international megabanker Deutsche Bank, who just upgraded Ford shares to buy, and assigned a $19 price target to boot.

Cited on StreetInsider.com this morning, Deutsche argues that Ford has strong prospects for sales growth in Europe and China, and that prospects elsewhere could see Ford enjoy "a significant earnings inflection in 2015-2016."

What has Deutsche feeling so confident? In the crucial U.S. auto market, the banker notes that the company's new largely aluminum-bodied F150 pickup truck is turning out to be a lot less expensive to build than formerly thought. Deutsche thinks that switching from steel to aluminum will add at most $800 to the truck's manufacturing cost. Even passed on to consumers in the form of higher prices, this may not hurt sales when you consider the additional savings consumers will enjoy on fuel, thanks to the F150's new, lighter body.

Indeed, according to Deutsche, Ford may be able to charge even higher prices on (and reap bigger profits from) the F150, given that it's currently selling F150s for only about $150 more than comparable General Motors (NYSE: GM  ) Silverado trucks cost (on average). Historically, Ford has charged closer to a $3,000 premium for its trucks. So a reversion to the mean could see Ford commanding much higher prices, and profits, on its wares.

In the analyst's opinion, the time to buy Ford stock is now, before those profits begin to appear on the income statement. But is Deutsche right?

Let's go to the tape
Over the nearly eight years that we've been tracking and recording this analyst's performance, we've seen Deutsche beat the market by about eight percentage points-per-pick on average. That's the good news. The bad news is that Deutsche guesses right on its stock picks only about 51% of the time -- so its advice is a bit of a hit-or-miss. And when it comes to Ford stock, Deutsche mostly misses.

 

Deutsche Bank Said:

CAPS Says (out of five stars possible):

Deutsche Bank's Picks Lagged the S&P By:

Ford in 2007

Outperform

****

37 points

Ford in 2008

Underperform

****

4 points

Ford in 2010

Outperform

****

35 points


Quite literally, every time Deutsche has uttered an opinion on Ford stock over the past eight years, it's been wrong. Every. Single. Time.

When you consider this track record, it's hard to be optimistic about Ford's chances now that Deutsche is singing its praises once again. It's even harder once you take a good hard look at the numbers.

Ford: buy the numbers?
Sporting a price-to-earnings ratio of only nine today, a 3.1% dividend yield, and an 11.4% projected growth rate, Ford stock hardly seems expensive. And yet, if you look under the hood, you'll soon see that this stock costs more than it seems.

Free cash flow  at Ford amounted to a mere $3.8 billion last year -- barely half the company's reported $7.2 billion in "GAAP" earnings. This suggests both that the earnings Ford reports are of low quality, and that Ford stock is more expensive than it appears. Dividing free cash flow into market cap, we find Ford shares selling for close to 16.5 times FCF, which is not an attractive price relative to 11.4% growth -- even with the dividend.

This is particularly true when you consider that archrival General Motors, although selling for a higher P/E ratio (and similarly free cash flow-challenged), pays a higher dividend yield than Ford does, and boasts a higher expected growth rate to boot. While I'm not a huge fan of GM stock (its 18.6 P/FCF ratio offers only a "fair" value relative to 18.7% projected earnings growth), I do believe GM shares are more attractively priced than Ford's.

The fact that Deutsche Bank is recommending Ford over GM only confirms my opinion.

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