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Tata Motors Stock Wins 4 Upgrades in 3 Days: What You Need to Know

By Rich Smith - Oct 30, 2019 at 3:18PM

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The Indian automaker is churning out cash by the bucketload.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Wall Street is going gaga over Tata Motors (TTM -3.50%) stock.

Seriously.

While Tata may lack the name recognition of automotive giants like Ford or General Motors for many American investors, the Indian automaker (which also owns Jaguar and Land Rover) has been quietly winning a surge of support from Wall Street these past few days. Since Monday, in fact, a grand total of four separate analysts -- CLSA, Emkay Global, Nomura Instinet, and DBS -- have upgraded Tata Motors stock, and three of the four think it's a buy.

Here's what you need to know.

Five dice labeled buy and sell on top of LCD screen displaying stock charts and numbers

Image source: Getty Images.

Earnings astound

What's the catalyst driving this wellspring of support for Tata? In a word: Earnings.

Last Friday, Tata reported its latest quarterly earnings report. Although the company lost money ($30.6 million) on a 9% decline in sales, this was much less than the $219 million that analysts had expected Tata to lose. More importantly, the company's most important business, the aforementioned Jaguar Land Rover (JLR), which accounts for nearly 75% of annual sales, is booming.

Improved product mix and strong sales in China drove JLR sales 8% higher in Q1, and produced a pre-tax profit of $174.5 million for the unit. Moreover, JLR CEO Ralf Speth told investors that they can expect JLR's profits to continue improving all year long (Tata's financial year runs through the end of March 2020), with improved cash flow and 3% to 4% operating profit margin to boot.

Upgrading Tata Motors

Wall Street loved hearing this news. On Monday, CLSA flipped its rating on Tata Motors stock from sell to buy and upped its price target by 58%. As the analyst explained (in a note covered by StreetInsider.com), although Tata's "Indian business will likely remain weak in FY20-21 due to the cyclical downturn in trucks ... JLR's volume is showing signs of bottoming-out and its margin has started to recover after four consecutive years of contraction." With the stock now "down 77% since Feb 2017 and near a 10-year low," CLSA thinks it's finally time to buy Tata Motors again.

Nor is CLSA alone in that view.

Indian investment banker Emkay Global flipped to buy as well on Monday, thanks to Tata's "strong growth from China and new products." The analyst thinks the company should enjoy 4% annual volume growth over the next three years.  

Singapore's DBS joined the chorus of buy raters this morning. And even Nomura  Instinet, which upgraded the stock only to neutral, added that profit margins on those additional cars sold should improve through cost-cutting (including "a 200bp q-q drop in variable marketing costs and a 200bp drop in warranty costs" already achieved) and "a strong model mix" -- with pricier cars presumably bringing fatter profit margins with them.  

What it means to investors

So long story short: More revenue for Tata, and more profits on that revenue -- perhaps for the next three straight years. That's more than enough reason for Wall Street to get excited.

And perhaps it's reason for ordinary investors in Tata to get excited as well.

Granted, the company isn't profitable currently. But even if Tata's GAAP numbers make the company look "unprofitable" today, its cash flow statement confirms that it is generating cash where it counts. S&P Global Market Intelligence data show that over the past 12 months, Tata generated $2.4 billion in free cash flow, or cash profits on a level similar to what the company was churning out back in fiscal 2017 -- when the stock was trading three times higher than where it trades today!  

At a valuation of less than three times trailing free cash flow, even a no-growth Tata Motors stock may be a bargain -- and if the analysts are right and this company can grow earnings at 4% or better?

In that case, Wall Street is certainly right to recommend it.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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