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.
Have you driven a Ford lately?
The news should have been good for Ford shareholders. But in fact, Ford shares gained less than 1.5% on RBC's announcement, lagging the 1.6% rise on the Dow. (It's even giving back some of those gains this morning, on news of a 20,000-truck recall.) Now, precious few of the Dow's 30 constituent stocks received buy ratings like Ford did. So how is it that Ford wasn't able to even match the Dow's gain?
Part of the reason, I suspect, is the utter lack of details on RBC's recommendation available to investors. While multiple media outlets confirmed that the "buy rating" is in effect, no one seems to have details on exactly what it is about Ford that appeals to RBC. It's a situation familiar to many investors, but frustrating nonetheless.
Fortunately, while we can't tell you much about why RBC thinks Ford is a buy today, we can at least tell you how well RBC does its thinking.
Let's go to the tape
Historically, RBC hasn't spent a lot of time following the world's carmakers. It's invested some time with Big Auto's bigger brethren, the RV makers, with mixed results [beating the market on Thor Industries
RBC's Picks Beating (Lagging) S&P by
Overall, RBC's grab bag of auto-related picks tends to mimic its overall record of stock picking, which, according to CAPS, puts this analyst among the top 5% of investors we track. But with Ford, RBC is basically starting from scratch in a new environment: Consumer-focused automobiles. Will it be proven right about this stock being a buy?
Ford: Buy the numbers
At first glance, I think I see what it is about Ford that might appeal to an investor like RBC. The stock sells for only 7.4 times earnings. That certainly sounds cheap. While more expensive than Honda
In short, there's a lot to recommend Ford at today's prices. Bad press from today's teensy 20,000-truck recall notwithstanding, it's entirely possible RBC may notch another winner with its Ford recommendation.
If there's one thing that concerns me about Ford -- and one thing that could upset the winning formula of the numbers shown above -- it's the balance sheet. Ford today sells for $49 billion. That's not much more expensive than GM, which is roughly Ford's size by annual sales. The key difference between the companies is that GM just emerged from a bankruptcy proceeding that decimated its debt, with the result that GM is a much less leveraged beast today than Ford is. In fact, GM today carries net cash on its balance sheet. In contrast, Ford's balance sheet shows $21 billion cash ... against $14 billion in debt at the auto business, and a further $85 billion at Ford Credit.
Pundits may argue whether it's "fair" to punish Ford for honoring its commitments and refusing to take the bankruptcy cop-out. They may refuse to invest in GM "on principle" -- and that's fine. I respect the opinion. But from a pure perspective of capitalistic profit-seeking, it seems to me that GM offers the better bargain as a stock.
When you get right down to it, seven times earnings is still cheaper than 7.4 times earnings, and net cash is still better than net debt. If I were a gambling man, and inclined to bet on which automaker is more likely to make you some money, I'd say GM is still your best bet.
Fool contributor Rich Smith owns no shares. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 587 out of more than 180,000 members. The Motley Fool has a disclosure policy.
The Motley Fool owns shares of Winnebago Industries and Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors and Ford Motor.
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