This Just In: Upgrades and Downgrades

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.

Riddle me this
When is a cut in Wall Street's target price a good thing for stocks?

Answer: It's good news when the analyst doing the cutting is getting more conservative in its outlook, but no matter how pessimistic it gets, it still can't find a good reason not to buy. That's the happy confluence of circumstances that greeted auto investors Friday, when Goldman Sachs cut its price targets on a raft of auto manufacturers and parts-makers -- but still argued that the sector is a "buy." In a flurry of slashing knives, Goldman quickly cut expectations on General Motors (NYS: GM) and Goodyear Tire (NYS: GT) , Federal-Mogul and Meritor (NAS: MTOR) , TRW and Tower International on Friday. But the only stock in the sector it actually told investors to sell was Goodyear.

Meanwhile, Goldman gave high marks to buy-rated General Motors, which the analyst says will gain 20 basis points in EBITDA profit margin next year. Goldman's even more bullish on parts makersLear (NYS: LEA) , Tenneco, and Dana -- all buy-rated -- and Ford (NYS: F) .

In fact, Ford may be Goldman's most promising pick, benefiting from a long-term trend of 15% annual profits growth in the industry. According to the analyst, Ford is positioned to outperform GM. Having made early investments in product development, Ford can now grow its profit margin twice as fast as its archrival in 2012, while GM plays "catch up." Or ... can it?

Tough luck for Ford
There are really two problems with buying Ford today, the first being the analyst recommending it. You see, bullish as Goldman may be about the stock, Goldman's record in the auto industry is anything but optimistic:

Wrong on Harley, wrong on Honda, wrong on Ford itself -- Goldman isn't turning out to be much of a "car guy." And even farther up the supply chain, Goldman has managed to make a mess of things, scoring only 25% for accuracy on its picks of companies such as Tenneco and Dana -- the very stocks it's telling investors to buy today. In short, having Goldman in its corner isn't necessarily a plus for Ford.

Junk bonds in the trunk
My other worry about investing in Ford is one I've written about previously -- its sizeable debt load. Total debt at Ford today runs to more than $98 billion, versus $22 billion cash, and is a big factor in why Ford bonds are still rated below "investment grade." True, most of Ford's debt is located with its Ford Credit business, while the auto business' debt is only $13 billion and falling. But given that Ford uses Credit debt to drive sales and earns profits on loans backed by this debt, I can't give Ford a total pass on this issue.

The way I look at it, $77 billion net debt, plus Ford's $38 billion market cap, results in an enterprise value of $115 billion. Relative to Ford's $6.8 billion in net income, that's about a 17 multiple to earnings on the company. Relative to Ford's superior free cash flow, it's a 16 multiple. To me, Ford's 7.6% projected growth rate just isn't speedy enough to justify these prices.

Foolish final thought
Admittedly, not all investors look at Ford this way. What's more, if you give Ford a pass on its finance arm's debt, then what you're looking at here is very attractive. Start with Ford's $7.2 in free cash flow. Compare that with its market cap alone. What you wind up with is a price-to-free cash flow ratio of 5.3 -- quite cheap for a 7.6% grower. But as I say, to reach this conclusion, you have to finesse the debt question, and I'm not willing to take that risk.

Are you? Do you think Ford's a buy regardless of its debt burden? Head over to Motley Fool CAPS now, and tell us why.

At the time thisarticle was published Fool contributorRich Smithowns no shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 429 out of more than 180,000 members.The Motley Fool owns shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of Ford and General Motors. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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