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." While the pinstripe-and-wingtip crowd is entitled to its opinions, we've got some pretty sharp stock pickers down here on Main Street, too. (And we're not always impressed with how Wall Street does its job.)
Given this, perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
Today, we're going to take a look at three high-profile ratings moves on Wall Street: upped price targets for a pair of our very own Motley Fool Rule Breakers picks, Tesla Motors (NAS: TSLA) and Westport Innovations (NAS: WPRT) , plus a schizophrenic reaction to NVIDIA's (NAS: NVDA) earnings report. Let's dive right in.
Tuning up Tesla
First up: Tesla Motors gave investors (and car buyers) a sneak peek at its upcoming Model X electric SUV this week, then quickly followed up with an announcement of Q4 "earnings." I use quotes here because what Tesla actually did in Q4 was lose money -- $0.78 per share, or 44% more than it lost in the previous year's Q4.
But not to worry. Calling 2012 "a year of two halves," management predicted a whiplash-inducing turnaround once its Model S sedan hits the market later this year, with "90%" of 2012 sales coming from the 5,000-plus electro-buggies it expects to sell in the second half. If all goes well, Tesla could triple 2011's revenues, raking in perhaps $600 million in sales this year. The news prompted Needham & Co. to stomp on the gas for its price target, predicting Tesla will end the year at $40 a share -- 14% more than previously expected.
Is it really worth that much, though? Pricing Tesla at $40 a stub would value the company at roughly $4.1 billion, or just under seven times sales. To put that number in context, rival automaker Ford (NYS: F) -- already profitable, and planning to introduce at least two electric cars of its own soon -- costs a mere 0.35 time sales, or 20 times less than what Needham says that Tesla is worth.
Granted, Ford's not growing its sales at 200% annually, as Tesla is. On the other hand, General Motors (NYS: GM) is also profitable, has its electric Chevy Volt on the market already, and is growing sales of this particular electric car from the same zero-base that Tesla is working from. And GM only costs 0.26 time sales...
Go Westport, young man!
Speaking of alt-energy plays, another stock getting some analyst love this morning is Westport Innovations, inventor of a new engine technology geared to helping ordinary cars and trucks run on clean-burning natural gas. Westport won a big vote of confidence from investment banker Northland Securities this morning, which upped its price target on the stock by 30%, to $52 per share.
Details on the upgrade don't appear to be publicly available (at least, not on any mainstream media site I've located). But it's interesting to note that Morgan Stanley issued a similar buy recommendation just two days ago, urging investors to buy Westport on an expected surge to $51 in share price. StreetInsider.com reports that this followed another price target boost to $45 at Jefferies earlier in the month, citing "positive commentary on NGV market dynamics by Westport's partners and customers."
$45, $51, $52 -- anyone else see a pattern here? The price of natural gas just keeps on plummeting, and the cheaper this fuel becomes, the more interested investors are getting in the Westport story. Still, with Westport unprofitable on a trailing-12-month basis, and analysts predicting no profits this year -- or next year either, for that matter -- investing in Westport still looks speculative to me. I'm all in favor of saving the environment, mind you; I just don't want to lose my shirt in the process.
Last but not least, we come to NVIDIA. The graphics chip czar reported earnings last night, and so far it looks like Wall Street was not amused. Despite growing sales 7.5% year over year, NVIDIA booked a 35% reduction in net profit. Forecasts of $900 million to $930 million in first-quarter sales also fell short of consensus estimates, and as a result, the shares are off 2% as of this writing.
It's probably not helping matters much that two analysts took NVIDIA's news as a cue to downgrade the stock -- Caris & Co. to "below average," and Bank of America to "neutral." Needham, in contrast, broke with the pack and pronounced itself more than happy with NVIDIA's results, boosting its price target by 18%, to $20 a share.
So, two against one, eh? That hardly seems fair, so let me weigh in to even up this fight. When I look at NVIDIA's earnings report, I admit that I, too, see it as something less than awesome. Free cash flow took a (small) hit in the fourth quarter. But even so, it still looks like NVIDIA generated a respectable $707 million in free cash for the year.
That's 22% better than NVIDIA's reported net income for the year, folks. The way I look at it, it's enough to give this stock about a 14 times price-to-free-cash-flow ratio. And if you net out NVIDIA's cash stash, the EV/FCF on this one comes to just about a perfect 10.0.
That seems cheap for the 16% long-term growth NVIDIA is pegged for. Plenty cheap for me to continue recommending it on CAPS, and plenty cheap for me to feel confident recommending a "buy" on the stock.
Whose advice should you take -- mine, or that of "professional" analysts like Caris, Bank of America, and Needham? Check out my track record on Motley Fool CAPS, and compare it to theirs. Decide for yourself whom to believe.
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At the time thisarticle was published Fool contributor Rich Smith owns shares of NVIDIA. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 380 out of more than 180,000 members. The Motley Fool has a disclosure policy.The Motley Fool owns shares of Ford and Bank of America. Motley Fool newsletter services have recommended buying shares of Westport Innovations, Tesla Motors, Ford, General Motors, and NVIDIA, as well as creating a synthetic long position in Ford and writing puts on NVIDIA.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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