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.
A slow week on Wall Street
Santa Claus has come and gone, but the holidays linger on Wall Street, where it appears all the analysts are still in hibernation today. We did get one interesting rating over the break, however, and we'll talk about it today: General Motors (NYSE:GM).
On Monday -- Christmas Eve -- Goldman Sachs announced it was reinstating coverage of GM with a "buy" rating, arguing the stock has better than 27% upside and could hit $35 a share within a year. Key to the banker's argument was GM's announcement that it is buying back 200 million of its own shares from the government, a move that could result in GM's share count shrinking by 12.7%.
As Goldman sees it, this reduction in the share count will have the effect of boosting per-share earnings (of those shares that remain in circulation) significantly. The analyst is therefore upping its estimates for 2013 and 2014 to levels now 17.5%, and 11.4%, higher than Street average --$4.49 and $5.36, respectively . (Note, by the way, that the Treasury Department's plan to liquidate its remaining 300-million-share stake will not have a similar effect -- because this final tranche of shares would be sold on the market, rather than sold back to GM).
Result: A stock that today sells for a bit more than 10 times trailing earnings -- and that many investors think of as trading at "seven times 2013 earnings" -- in Goldman's view costs barely five times what GM will earn just two years from now.
For a company that most analysts think will maintain double-digit earnings growth over the next five years -- and double the rate of growth at Ford (NYSE:F) -- that does seem to justify a buy rating. The fact that GM's price-to-earnings ratio is currently cheaper than those at rivals Honda Motor (NYSE:HMC) and Toyota Motor (NYSE:TM), too, appears to argue in the stock's favor.
And yet, I still hesitate to take Goldman's advice on General Motors. Why? Because to put it politely, this banker doesn't really have a great record on similar recommendations it's made in the past.
In fact, over the six years we've been tracking Goldman's performance as a stock-picker, it's achieved a success rate of only 20% -- just one pick in five -- in the automobiles sector. Nor do all of Goldman's explanations for why it's upgrading the stock this week ring true, exactly.
Take, for example, the analyst's suggestion that one reason to be bullish on GM is because its profit margins in North America are beginning to converge with those of Ford. Fact is, in 2011, Ford's operating profit margin of 8.2% was only about 20 basis points better than GM's 8%. So even if Goldman is right on its point, there's probably not a huge amount of improvement to be made on that score.
Or consider Goldman's other argument, that there's "secular improvement" afoot in the profitability of GM's Brazilian operation. Fact is, South America is the smallest of GM's four geographic markets, and Brazil only a fraction of the whole. (It's also losing money). What's more, over in Europe, GM is losing $0.028 for every dollar's worth of cars it sells.
Nor does GM always fare so well in comparison to other car companies you might consider. Fast as GM's expected to grow, for example, Street analysts still expect both Honda and Toyota to outgrow it over the next five years. And relative to Ford, well... over the past 12 months, Ford generated $4.4 billion in positive free cash flow from its business. That's more than twice the $2 billion GM generated -- and on 12% fewer revenues than GM booked!
Meanwhile, Ford's gaining ground on GM's Volt hybrid electric car. Just last month, General Electric (NYSE:GE) made a big bet on Ford when it ordered 2,000 new Ford C-Max Energi hybrid SUVs. While Ford's run into a bit of trouble with the car since -- over claims that it earned a higher miles-per-gallon rating from the EPA than car reviewers have been able to duplicate in real-world driving -- reviews of the C-Max have been by and large positive.
Factor in the fact that Ford, at 8.5 times next year's earnings, looks cheaper than GM at 7.2 times (once you factor in Ford's 1.7% dividend yield, and GM's lack thereof), and there's still reason to wonder if GM really is the best buy out there in automotive stocks.