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 ...
"Timing," they say, "is everything." And UBS picked a particularly propitious time to release its latest upgrade of General Motors
The reason: Fukushima Daiichi. Japan's once-in-a-millennium earthquake, tsunami, and nuclear meltdown have wreaked havoc on Japanese automaking supply chains, upset the semiconductor industry, and dealt a PR nightmare to General Electric (which built the reactors), but it's turning into a "previously lacking catalyst" for that other "general" of American industry -- GM.
Location, location, location
Realtors tell us these are the three words most crucial to investing in real estate. Turns out, they're pretty important to automotive investors as well. Because as yesterday's April sales reports show, America's the place to be today, where Ford
According to UBS, supply shortages and production interruptions in Japan are behind much of these sales dynamics. What's more: "Given its size, we believe GM will be the biggest beneficiary of the upcoming Japan-related inventory shortages, with the potential to gain of as much as 110 [basis points] of additional share in 2011. We expect these gains can boost 2011 EBIT by $1bn and EPS by $0.60/share. ... While we have been cautious on GM to date, we now view the Japan situation as the catalyst we've been looking for to carry GM through its weak launch period. In addition, we see Q1 EPS rebounding from a weak Q4." Is UBS right?
Let's go to the tape
If history is any guide, it really should be. Because so far, UBS has done a fine job of picking winners (if not so fine a job picking losers) in the auto industry. Over the four years we've been tracking its performance here on CAPS, UBS has racked up a record of 62% accuracy on its automotive picks:
UBS's Picks Beating
|Daimler||Outperform||Not rated||33 points (picked thrice)|
|Ford||Outperform||***||398 points (!)|
And yet, not even UBS is perfect. While it's done a good job handicapping the racehorses down at the bottom of the supply chain, this banker's been less successful higher up. Fewer than 40% of UBS' picks among the auto components makers who feed into GM have outperformed the market, with UBS bungling calls on everyone from American Axle
Valuation, valuation, valuation
The more so when you look at the numbers. Listen -- I get where UBS is coming from with its optimism. April's numbers look fabulous. Toyota's on the ropes. In all likelihood, GM will astound and amaze investors with its earnings report tomorrow, and the stock will skyrocket. But so what?
When I urged investors to buy GM at its IPO last year, valuation was key to my thesis that you could Get Rich from the GM IPO. Problem is, so far that value has been slow to appear. At 11.5 times earnings, GM's price may not look too out of whack relative to consensus expectations for 10% long-term growth at the company. I get that. But according to GM's cash flow statement, the company's "profits" still aren't all they're cracked up to be.
Foolish final thought
Here's why: At last report, free cash flow was running at less than half the rate of reported GAAP "profits." With $2.6 billion in trailing FCF, GM now sells for nearly 20 times the amount of cash it can generate in a year. For a 10% grower, that's too little cash flow, selling for too high a price.