GM among Morgan Stanley's top picks

Even for less-than-bullish analysts, the automaker's stock is indisputably cheap.

By TheStreet Staff Jul 7, 2011 10:46AM

the streetBy Jake Lynch, TheStreet

 

General Motors' (GM) stock has rebounded 11% from its 52-week low but remains in deep-discount territory, even as analysts boost their earnings forecasts.

 

BusinessWeek and Bloomberg on Tuesday reported about the company's channel stuffing, or flooding of dealers' inventory to goose profits. Betting on a strong rally in SAAR, or the seasonally adjusted annual rate, for cars, some dealers now have excess inventory, presenting risk to GM, which may have difficulty maintaining its sales and profit levels.

 

For investors, or potential investors, in GM, this isn't news. Bearish traders have been touting this practice for months as a reason to avoid the stock. Along with souring economic data, channel stuffing is a relevant counterargument to the bullish case. Nevertheless, savvy investors know to build positions amid negative news flow because once it dissipates, stocks tend to rise.

 

Regardless of channel stuffing, GM remains a compelling long-term value, selling for a 2011 price-to-earnings ratio of 7.8 and a free-cash-flow multiple of 8.3, discounts of 49% and 75%, respectively, to automotive peers. Wednesday, Morgan Stanley (MS) added GM to its Best Idea List, which comprises just a handful of the bank's favorite risk-adjusted investments. It also upgraded its auto-industry view to "attractive." GM replaced Ford (F) as the bank's "top overall pick."

Still, Morgan Stanley rates Ford "overweight." It says GM "offers a powerful combination of positive near-term earnings revisions and negative investor sentiment, held up by open-ended questions surrounding the U.S. Treasury hangover, UAW (labor) negotiations and the deployment of GM's fortress balance sheet." Morgan Stanley isn't alone. Three-quarters of analysts rate GM's stock "buy." But, Morgan Stanley has the highest 12-month price target, at $50, suggesting a 60% return. The next-highest target, at $49, is offered by Credit Suisse (CS).

 

Morgan Stanley predicts that four catalysts in the second half of 2011 will attract investors to the stock:

  1. Positive earnings revisions. Strong demand growth, offset partially by high inventory, has led Morgan Stanley to estimate $5.20 of 2011 earnings, giving the stock a current-year multiple of just 5.9.
  2. Uncertainty stemming from the Treasury's additional half-a-billion share sale and a new United Auto Workers' contract will be alleviated by mid-September.
  3. The European Opel unit may gain more market share than currently expected.
  4. A product cycle revival is going to coincide with a higher SAAR, elevating sales.

A sum-of-the-parts analysis is one justification for Morgan Stanley's $50 target. First, nearly half of the current stock price, or $14, is accounted for by cash on hand. The bank estimates the value of deferred tax credits and NOLs, or net operating losses carried from the bankruptcy, at $9 a share. The NOLs allow GM to defer profits from state and federal taxation. Morgan Stanley values Chinese joint ventures, critical to growth, at a conservative $5.

 

Thus, "one can account for nearly 100% of the GM share price before considering its consolidated operating business." Morgan calculates a bear-case target of $22, assuming a modest recovery to a 12 million SAAR, a European margin at negative 2% and no growth in the Chinese ventures. Its bull-case price target is $72, meaning the stock could rise 126%.

 

In truth, the most likely scenario is an ongoing shift to a weaker product mix in the U.S., where consumers have developed a taste for fuel-efficient vehicles, and rapid growth in BRIC nations. Relative to Ford, GM is leveraged to these growing markets, which should drive sales and margins going forward. In addition to more amenable labor agreements, the new GM has a vastly superior balance sheet, with a net cash position (cash minus debt) of about $25 billion. So, those who argue that channel stuffing is proof of a resumption of bad habits are making a selective argument. Net liquidity, a U.S. tax shield until 2018 and developing market leverage are solid investment merits.

With that being said, the domestic business remains pressured, especially as gas prices rise. Crude oil remains near $100 a barrel. On Tuesday, Barron's made the case for $150 oil by next spring, citing fundamental evidence for a sustained uptrend. In such an environment, consumer spending will, again, be crimped and many would-be car buyers will delay new purchases, even on fuel-efficient vehicles, which still require a substantial up-front cost.

 

Morgan Stanley may have gone out on a limb with its forecasts. For example, its 2012 earnings estimate, at $6.60 a share, is 31% above the Wall Street consensus. Its 2013 projection, at $7.90, is 24% above the consensus.

 

However, even though these estimates appear aggressive, the central thesis is not. GM's stock has a median price target of $43.55, suggesting it has 40% upside, and is considered, even by those with "hold" recommendations, to be undervalued. GM is a bargain for long-term investors.

 

Related Articles

1Comment
Jul 7, 2011 2:34PM
avatar
GM (Government Motors) is a bargain for long-term investors

 Smile GM is NOT a bargain for long or short term investors. There are so many other well managed dividend and growth companies that this article means only one thing - MS is long GM.  Ford is a much better investment than GM is you have to invest in US automobiles.  However, there are much better companies such as Apple, AT&T, GE, Intel, Microsoft, Pfizer and on and on.  The only thing that GM is a good investment for is the US Government - it saved a lot of jobs at a very high price for US taxpayers and we should each get shares of stock as a tax refund. Sick

 

Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

STOCK SCOUTER

StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

116
116 rated 1
265
265 rated 2
429
429 rated 3
612
612 rated 4
499
499 rated 5
525
525 rated 6
701
701 rated 7
533
533 rated 8
337
337 rated 9
131
131 rated 10
12345678910

Top Picks

SYMBOLNAMERATING
UPLULTRA PETROLEUM Corp10
COPCONOCOPHILLIPS9
TAT&T Inc9
DVNDEVON ENERGY CORPORATION9
EOGEOG RESOURCES Inc9
More

VIDEO ON MSN MONEY

ABOUT

Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.