Analysts love to grab headlines. And to do this, they often
resort to their favorite ploy: The super-sized price target. So
when analysts at Morgan Stanley predicted that
might eventually soar to $100, I and others
sat up and took notice
Morgan Stanley's analysts predicted thatshares would start to build
higher right away on the heels of yet-to-be-released fourth quarter
results. To be fair, their $100 target was predicated on results
several years into the future. But so far, this bold prediction
looks like a dud. The stock is off 18% since we looked at this
investment thesis, trading right around its 52-week low.
Were the analysts flat wrong? Or were they simply premature? Let's
take a look...
In hindsight, the analysts overlooked one major point of
concern: rising oil prices. GM, along with
, remains highly dependent on pick-up trucks and SUVs for the bulk
of profits. Generally speaking, the bigger the vehicle, the fatter
theprofit margin . Crisis in the Middle East has helped fuel an oil
price spike, leading many to conclude that truck sales, which had
recently been more robust, were about to take a big hit. That
conclusion is likely premature, especially if the U.S.economy
builds a head of steam.
A confusing quarter
GM'sshares started to slide when the automaker released
fourth-quarter 2010 results on Feb. 24. GM's profits came in ahead
of forecasts, but some questioned how GM can turn around its
unprofitable European operations. Management did no favors to
short-term focused investors by detailing plans to ramp up
engineering expenses to help beef up a thin slate of scheduled new
vehicle releases. The $510 million quarterly
was also below the profit earned in prior quarters, though much of
that is attributable to expenses associated with the recentIPO
(initial public offering).
Most analysts were fairly surprised that the stock sold off.
Citigroup raised its target from $47 to $50 (roughly 50% above
current levels), noting that higher-than-expected cash-flow
projections in coming years were the real take-away from the
quarter. Although Goldman Sachs dropped its price target from $45
to $42 (due to a possible shift away from high-margin trucks), its
analysts "still see the
presenting one of the best values in the space."
What about Morgan Stanley? Its analysts have come to realize they
have underestimated some of the potential headwinds when they came
up with that lofty price target. Instead of looking several years
out with a $100 target, they now speak of a $50 target during the
next 12 months. Nevertheless, that's far above the current $32
One of the reasons many institutional investors have dumped the
stock is that few timely catalysts exist: the first quarter may
show signs of a slowdown in truck sales; the crisis in Japan is
leading to shutdowns at some of GM's U.S. auto plants because key
components such as hybrid transmissions have been sourced in Japan;
and a recent sudden departure of GM's Chief Financial Officer has
led to questions of leadership.
Yet these are all short-term factors. If you assume oil prices will
cool off once Middle East tensions abate, then the whole
institutional crowd will swing right back around and start buying
This all obscures a much larger picture. The whole point of the GM
restructuring, and all the enthusiasm around the company at the
time of the November 2010
, was about the really bright long-term picture for the "new GM."
This is a company so vastly different from the old GM in terms of a
far cleanerbalance sheet , a much improved line-up of vehicles,
belated-but-real momentum in emerging economies such as China and
perhaps newfound respect among American car buyers. So to quibble
with how the next few quarters will be impacted by rising
engineering expenses, or to write off truck sales even though many
work trucks have been in the field for quite some time, or to
question why the CFO is departing is simply myopic.
Action to Take -->
Morgan Stanley was likely a bit reckless with that lofty $100 price
target. But the sentiment was correct. GM is on the road to far
higher profits as the new vehicle cycle plays out, and shares
should be getting more respect after the IPO. If you have a
time-frame that extends past one or two quarters, then this still
looks a great name to own.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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