General Motors Company (GM) and Ford Motor Company (F) don’t get enough respect from the market, but maybe an analyst’s initiation of coverage in GM and F stock will help change that.
Piper Jaffray on Friday started following F and GM stock and gave both of these underpriced companies a rating of “Overweight.” That’s essentially the same thing as a buy.
We like this move.
True, the market is concerned that it’s late in the auto sales cycle, and both GM and F sputtered a bit last month. But you could argue that both these stocks already price in the risk — and then some. Ford and General Motors stock are just too cheap to ignore.
Piper Jaffray analyst Alexander Potter praised Ford’s fair outlook, big balance sheet and the hefty dividend yield, currently at 4.6%.
Here’s more from the analyst:
“While the U.S. auto cycle is undeniably ‘long in the tooth,’ this doesn’t necessarily imply an impending drop in vehicle sales. Stable demand in the U.S., rising market share in China and improving margins in Europe could combine to drive more earnings growth than is currently implied by (Piper Jaffray/Wall Street estimates).”
Potter says Ford stock’s lackluster performance this year due to investor pessimism regarding the auto and truck cycle, but the market is overdoing it. The analyst sees no evidence of U.S. auto demand heading for a “cliff event.”
Furthermore, investors might be worrying about the slowdown in China more than they should. By Potter’s reckoning, North America will account for a third of this year’s total revenue. But here’s the kicker: North America will generate 5.5x and 10x more than China and Europe, respectively.
General Motors and Ford Stock Get Ambitious Price Targets
Piper Jaffray’s price target of $17 leaves Ford stock with implied upside of close to 30% in the next 12 months or so.
As for GM, Potter likewise started coverage at overweight and slapped a fat target price on shares. At $41 a pop, General Motors stock has implied upside of 40% in the not-too-distant future.
As with Ford, pessimism over the auto and truck cycle is overwrought:
“In terms of new-vehicles-per-capita, the U.S. auto market remains under-saturated, at least relative to historical norms. With this in mind, we expect a ‘plateau’ not a ‘peak.””
Importantly, the analyst sees GM having no issues in defending its 10%-plus margins. Even if sales do plateau, the U.S. market offers a stable source of income for GM. It actually has something of a floor on profit.
GM trades at even lower multiples than Ford. And Potter says sentiment is relatively down on the name because it doesn’t have some of Ford’s growth drivers — but that doesn’t mean it’s overpriced. From the note to clients:
“But that doesn’t mean the stock is a bad value. GM also offers a more aggressive buyback program than does Ford, and the company’s captive financial services company has more scope for expansion.”
At this point, F stock and GM stock don’t get the benefit of any doubt, and that could weigh on their valuations for a while longer. But at some point, the monthly and quarterly results will force investors to come around to their bargain-basement prices.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
