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.
And speaking of the best...
Earlier this week, in an exercise in timing that can only be described as "peculiar," ace analyst Standpoint Research pulled its "buy" recommendation on Ford (F 0.08%), and downgraded the automaker to "neutral."
Granted, Ford stock has been on a bit of a run lately, rising more than 20% from depths last plumbed in early August. so perhaps a decision to take some profits is understandable. What's really curious about this decision, though, is that at the same time as Standpoint was downgrading Ford, the analyst initiated a new recommendation on Ford's archrival, General Motors (GM -0.04%) -- and told investors to "accumulate" (read: "buy") that stock. According to Standpoint, GM, currently selling for less than $25 a share, is headed for $28 and beyond, and could potentially fetch $32 a share within the next two years.
Really?
Really. This is really curious because, if you pay attention to the headlines, they appear to be telling an opposite story. Earlier this week -- just about at the same time Standpoint was issuing its advice in fact, General Electric (GE -2.11%) announced a deal to buy 2,000 of Ford's new C-Max Energi gas-electric hybrid minivans as part of its plan to assemble a fleet of 25,000 electric and hybrid-electric vehicles for use by GE employees.
The Ford deal appears to put fewer Ford vehicles in the GE motor pool than there are GM vehicles already there. At last count, GE said it had about 5,000 electric vehicles (EVs) already bought or on order. If 2,000 of these are Ford C-Maxes, then it stands to reason that the rest of them (or nearly all of the rest of them) are Chevy Volts.
Still, the momentum in the race to fill GE garages with EVs does appear to be shifting in Ford's favor, and away from GM. According to data obtained from the companies and from the EPA, Ford's C-Max outclasses the Chevy Volt in miles per gallon equivalent (MPGe) by a distance of 108 MPGe to 98 MPGe. Ford's announced pricing on the C-Max (under $30,000) also appears to undercut the Volt (more than $31,000) slightly, after federal tax incentives are figured into the mix. Factor in the larger size, and cargo capacity of the C-Max, and it would appear that Ford's hybrid offering outclasses GM's by a considerable margin.
So if all this is true, why pick GM over Ford?
Valuation matters
One possibility has more to do with the respective prices of the companies, than of the cars they build. Taking forward earnings estimates at face value, Ford shares currently sell for a forward P/E ratio of 7.5, versus a 6.6 forward P/E ratio at GM. (For context, Honda Motor (HMC -0.49%) has an 8.5 forward P/E, and Toyota Motor (TM 1.07%) costs a lofty 10.4, which explains why Standpoint is doing its car shopping at home, and not abroad.)
Then again, we know all about the perils of investing in companies based on earnings they haven't actually earned yet, right? Focusing therefore on "facts on the ground" -- P/E ratios based on trailing-12-month earnings, we get a different picture of the relative valuations of these companies.
Both Honda and Toyota look relatively overpriced at nearly 14 times earnings apiece. Meanwhile, though, Ford carries an ultra-cheap 2.5 P/E ratio, versus GM's 9.3. This suggests that of the two American opportunities, Ford really is the better bargain.
Furthermore, free cash flow paints a similar picture. Ford, with $4.4 billion in trailing free cash flow, outclasses GM's even $2.0 billion. When valuing the companies on the actual cash they produce, rather than the "GAAP profits" they claim to be earning, or are expected to earn next year, Ford again looks like the better bargain at a price-to-free cash flow ratio of just 9.5 -- versus a whopping 19.3 for GM.
Foolish final thought
If that isn't enough to swing you over to the Ford camp, consider too that Ford pays its shareholders a 1.8% dividend annually, while GM pays precisely... nothing. Long story short, whether it's earnings reported, cash earned, dividends paid out, or victories in the marketplace that matter to you most, Ford appears to trump GM in just about every contest the two stocks get into.
The only place GM has the advantage is in expectations of future earnings, and future earnings growth rates. If GM was outclassing Ford with its products, I might have more confidence in such future predictions. As things stand, though, I have to believe that the advantage remains with Ford.
