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 tool for rating stocks and analysts alike. With CAPS, we'll be tracking the long-term performance of Wall Street's best and brightest… and its worst and sorriest, too.
And speaking of the best ...
As the trading week drew to a close Friday, Swiss investment banker UBS waded into the troubled U.S. auto sector with a fistful of ratings, and handed them out thusly:
- Motley Fool Stock Advisor pick BorgWarner (NYSE:BWA) got assimilated into the ranks of UBS "neutral" recs.
- General Motors (NYSE:GM) stalled upon initiation at "sell," while AutoNation (NYSE:AN) declared independence from optimism -- downgraded to "sell" from "neutral."
- But it wasn't all bad news. UBS initiated both Ford (NYSE:F) and Johnson Controls (NYSE:JCI) at "buy."
Buy? Why?
The reasons for the ratings varied, but basically broke down along two lines of question: Who's likely to survive the auto industry shakeout, and who's best placed to gain share from the losers.
Following in the footsteps laid down by fellow Euro-banker Deutsche Bank earlier this year, UBS seems to view stock of "Big Three" (almost an ironic term these days) automakers as a bet on (or against) insolvency risk. Although UBS admits that Ford is a "high-risk investment," it expects Ford has sufficient liquidity to avoid requiring a government bailout. Conversely, in discussing the government bailout of GM and Chrysler, UBS says that its sell rating on GM "reflects our view that the restructuring will be highly dilutive to shareholders." Hence the diametrically opposed ratings. Liquidity concerns likewise explain the sell rating on AutoNation, as car buyers eschew new rides and flock instead to used-carriage purveyors like America's Car-Mart.
Meanwhile, upstream from the carmakers and sellers, UBS believes that Johnson Controls will steal market share from rivals like Lear (NYSE:LEA), but believes such hopes are futile for the Borg.
And yet, Switzerland is a long way from Wall Street, and even further from Detroit. What are the chances that UBS is seeing things clearly in the U.S. auto sector?
Let's go to the tape
Based on UBS reputation, I'd say the chances it's calling these stocks right look pretty good. Reviewing the analyst's record on CAPS, I see here a banker that gets more than half its picks right, beats the rest of the market by nearly two points per pick, and outperforms more than 88% of investors tracked by CAPS.
Granted, UBS doesn't have much of a track record (at least of recommendations it's made public) in this sector. We don't have the company on record with previous picks for either Ford or GM. And the one pick it has made in the sector -- Daimler -- is underwater by a small amount. That said ...
I'm at a loss
Fools, at this point in the column, having laid out the case for or against a stock by the analyst picking it, I normally crunch the numbers and tell you what I think. Not today.
Why not? Because I'm at a loss. Gimme a stock with positive free cash flow, prospects for generating more of the greenbacks in years to come, or at the very least a price-to-earnings ratio that makes sense -- and I'm happy to take a stab at a valuation for you. For example, when I look at Johnson Controls, I see $545 million in trailing free cash flow generation, an $11.3 billion enterprise value, and the alarm goes off on my value-seeking radar: "It's not cheap enough yet. Don't buy."
Same deal for BorgWarner, whose free cash flow has all but disappeared underneath the automotive sector pileup over the past year. Conversely, despite carrying a hefty slug of debt, AutoNation looks reasonably priced based on its strong free cash flow and respectable growth rate. (As I suspect Sears Holding (NASDAQ:SHLD) owner Eddie Lampert would agree.)
But with Ford and GM, I honestly haven't a clue.
I mean, right now, Ford is losing $0.10 for every $1.00 in sales it makes. GM books a $0.21 loss for every revenue-dollar. While I can look at these numbers and guess that, yeah, GM's probably in worse shape than Ford, the truth is that that's about as far as I can go. I think Ford should outperform GM based on the fact that it's slightly less un-profitable, but I've no way of knowing whether either company will avoid bankruptcy in the end.
Foolish takeaway
When you get right down to it, if both companies keep on driving down the road they seem to have chosen, the endgame looks the same: A zero stock price. And if that's the case, then it doesn't really matter who gets there first.
