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 track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too...
News flash!
Guess what, folks? Wall Street loves General Motors (NYSE: GM). Newswires were all atwitter yesterday over the announcement that multiple major investment banks had initiated coverage on GM:
- Bank of America : "Buy."
- RBC Capital: "Outperform."
- Barclays : "Overweight." GM Europe will break even by 2012, removing a drag on profits.
- Credit Suisse : "Outperform." GM's stint in bankruptcy has erased "nearly $93 billion in liabilities." The company's selling for a "deep discount" relative to Ford (NYSE: F).
- Citigroup : "Buy ... GM may be the most compelling 1-3 year auto turnaround story in our universe."
- JPMorgan Chase (NYSE: JPM): "Overweight." The company could produce $4.3 billion a year in free cash flow, sufficient to pay off all its obligations by 2013.
- Morgan Stanley (NYSE: MS): "Overweight." GM's tax credits alone are said to be worth $9.18 per share, and the shares should fetch $50 within a year, easy.
- Soleil Securities: Hold.
Hold up a sec ...
That last one kind of jumps out at you, doesn't it? I mean, it's only natural that bankers who helped sell GM shares to the public -- who probably still own quite a few shares themselves, and would like to sell 'em for a profit -- would make bullish noises about the stock. And seeing as how just about every banker in the country did have a hand in bringing the GM IPO to market (I hear microcap Trinity Bank down in central Texas was left off the list, but they may have been the only one), it's not terribly surprising to see the vast, vast majority of these banks are now praising the stock.
What is surprising is to see one of the IPO's backers -- albeit one that underwrote one of the smaller share allotments -- taking a step back from the herd and expressing caution. That's why, out of all the fine analysts named above, its Soleil Securities' opinion of GM that most interests me today. Here's what Soleil had to say about GM:
An improved cost structure, along with higher industry sales, fewer cash-back discounts in the U.S. market and strong growth abroad ... have led to better-than-expected financial results at GM in the first nine months of 2010. Even so, Soleil thinks GM will earn only $3.00 per share in 2010, followed by $3.25 in 2011. (That's as compared to consensus analyst estimates of $3.40 this year, and $3.95 next year.)
So rather than the "Forward P/E: 8.94" you see on Yahoo! Finance, Soleil would argue GM actually costs something closer to 12 times next year's earnings, a valuation within spitting distance of Honda Motor's (NYSE: HMC) price-to-earnings ratio -- and fully a third higher than Ford's. Clearly, Soleil believes that's too high a price to pay for GM today. Unfortunately for Soleil, it's wrong. GM deserves every penny of that valuation.
Strength in numbers
At this point, I should mention that our CAPS data shows that all of the analysts rating GM yesterday are pretty equally successful at the stock-picking game. (Click here to see for yourself.) With the exceptions of JPMorgan and Morgan Stanley, which don't submit their ratings to Briefing.com for independent analysis, each of the bankers opining on GM this week ranks among the top 10% of the investors we know of. So really, there's no reason to prefer Soleil's opinion on GM over those expressed by the other bankers; they're all equally good.
That being the case, I think I'm going to have to side with the majority on this one. Why? Consider: GM may cost more than Ford, but it's also got several things Ford does not:
- A working electric car, already available for sale. Ford's Focus Electric isn't due out until late next year. That's before Honda, Toyota (NYSE: TM), or Tesla (Nasdaq: TSLA) will bring their new products to market, but (alongside Nissan) GM's got pole position here.
- Tacit support from Uncle Sam. The Feds have a vested interest in seeing the GM IPO succeed -- at least until they have a chance to dump the rest of their shares, and recoup the rest of the funds taxpayers paid to save GM from extinction last year.
- In proof of which, the IRS has allotted GM $45.4 billion worth of tax-loss carryforwards -- essentially, the right to earn profits tax-free until such time as its bill passes that mark.
Foolish takeaway
Mind you, I'm not saying any of this makes GM a better car company than Ford. I'm not even saying it makes the stock a better investment than Ford's. What I am saying is that, the $45.4 billion "gift" from Uncle Sam alone justifies GM's market price today. When you throw in the other advantages, there's simply no question about the matter: Wall Street's 100% right to be buying GM today.
