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.
Time to live high on HOG?
In just a few short days, motorcycle maker Harley-Davidson (NYSE:HOG) rides onto Wall Street to announce its Q3 earnings. Here at Fool.com, my fellow Fool Seth Jayson has already told you what Wall Street will be looking for next week. What's surprising, though, is that some analysts think they've seen the future at Harley already. Goldman Sachs, for example.
Yesterday, Goldman urged investors not to wait for the good news, but go ahead and buy Harley ahead of earnings. Why? Weak retail sales in the economy generally, combined with worries over production bottlenecks at Harley in particular, have driven HOG shares down nearly 20% from their April 25 peak. But Goldman thinks Harley enjoyed a "reacceleration of sales in September," and that these numbers will allow it to raise guidance for Q4 when it reports Q3 results on Tuesday.
Longer term, Goldman is also bullish on the recovery in America's housing industry. According to StreetInsider.com, the analyst thinks greater housing construction numbers will lead to higher employment, more and bigger paychecks... and more sales (and profits) for Harley.
Testing the logic
Granted, you could apply this same logic to pretty much anyone who makes stuff that moves construction workers from Point A to Point B. Harley, Ford (NYSE:F), General Motors (NYSE:GM) all fit the bill. Considering that it's a whole heckuvalot easier to transport drywall and cinder blocks from storage depot to build-site by pickup truck than on motorcycle-back, a housing recovery might actually benefit Ford and GM more than it does Harley.
Probably not coincidentally, at last report Goldman also had buy recommendations out on both Ford and GM -- Honda Motor (NYSE:HMC), too. Although as far as we can tell, it's not rounding out the list with Toyota (NYSE:TM), the only major automaker not to receive a "buy" endorsement from Goldman. Yet.
Goldman's buy-thesis on Harley -- its buy-theses on automakers generally -- also gains support from a new report out of the National Association of Home Builders, which argues that each new home built in America generates three full-time jobs and $90,000 in new tax revenue. That's plenty of money to support the potential for three new car/truck/bike sales -- not just among construction workers, but among cabinet makers, hardware manufacturers, home improvement store salespeople, and on and on.
And according to the Commerce Department, we built 872,000 new homes last month...
Slow and steady wins the race
Okay. So far, this all sounds good. But out of all these companies, which of them has the most potential? Is it Goldman's latest favorite stock, Harley-Davidson, or one of the more traditional automakers?
Let's run a few numbers and find out.
Valued on forward P/E ratios, Harley is currently the most expensive stock in the group, boasting a share price fully 13 times as big as what it's expected to earn next year. Ford and GM are cheapest, selling for 7.1 and 6.6 times fiscal 2013 earnings, respectively, while Toyota and Honda cost in the mid-range -- 9.3 times and 9.7 times next year's earnings respectively.
The key thing to focus on, though, is how fast these earnings are expected to grow over the next few years. Analysts on average project only 12.6% long-term profits growth for Harley, which may not be enough to justify the stock's highest-in-class P/E ratio.
In contrast, Toyota and Honda have the fastest projected growth rates of 32% and 42% per year, respectively. Accordingly, the Japanese automakers appear to offer the most potential for growth investors -- assuming these uber-optimistic growth rates pan out.
Meanwhile, Ford and GM are probably the best bargains for value investors. GM offers a modest, but more achievable growth rate of 11% -- attractive for a stock selling for less than 7 times forward earnings. Expectations will be even easier to meet at Ford, expected to grow its earnings at less than 8% per year, which is again an attractive rate in light of the company's 7.1 P/E ratio.
So which of these stocks should you buy? According to Goldman, pretty much any one of them (except for Toyota) should fit quite nicely in your portfolio. Perversely, though, it's the stock Goldman just recommended -- Harley-Davidson -- that appears to offer the least value for your money.
Fool contributor Rich Smith does not own shares of, nor is he short, any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 292 out of more than 180,000 members. The Motley Fool has a disclosure policy.
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