This Just In: More 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.

Have you invested in Ford... lately?
(NYS: F) investors received the gift of an analyst upgrade from Standpoint Research yesterday, but don't expect them to be sending Standpoint any thank-you notes. A more backhanded compliment has rarely been seen on Wall Street. Here's how it read, in relevant part:

During the last two years since [Standpoint's Jan. 13, 2010] downgrade, Ford shares have underperformed the consumer discretionary [index] by ~ 4000 bps and underperformed the S&P-500 by > 2000 bps. We are reinstating the recommendation at this time, but it is risky and not recommended for those who are already significantly overweight in consumer discretionary and/or holding on to a high-beta portfolio.

(Gee whiz, guys. Don't sugarcoat it or anything.) And yet, despite posting the analytical equivalent of "Beware of Dog!" and "No Trespassing! This Means You!" signs all around its upgrade, Standpoint nonetheless sees opportunity in Ford shares today. Why?

We arrive at our $17 target for 2013-2014 by attaching an 8X-9X multiple to ~ $2.00 in EPS potential/expectations. [Ford is] moving in the right direction [on] international expansion and domestic sales.

Indeed, February's U.S. sales rose 14% for Ford. That wasn't quite as good as the 40% bump Chrysler got, but it exceeded the twin 12% sales spikes at Honda (NYS: HMC) and Toyota (NYS: TM) , and blew right by General Motors' (NYS: GM) measly 1% increase.

Sure, automotive newcomer Tesla (NAS: TSLA) is telling folks that it plans to triple its own revenues in 2012. But Tesla is growing off a much smaller and much more flush sales base. Among actual established automotive companies selling to the mass market, Ford is more than holding its own. Ford boasts a better operating profit margin than Honda, Toyota, or GM. And if Ford continues growing at a 12% pace, then Standpoint's suggestion of an eight- or nine-times multiple doesn't sound all that unreasonable.

Caveats... and a conundrum
That's not to say Standpoint's definitely right about Ford being a buy, however. Take the presumed $2 in earnings, for example. According to S&P Capital IQ, the consensus of analysts tracking this stock is that Ford will earn only $1.72 per share in 2013, and $1.90 in 2014. Standpoint's estimate for Ford earnings is, therefore, a bit more optimistic than most analysts are predicting.

It's also worth pointing out that even the profits Ford does earn may not be worth quite as much as they appear to be. Ford reported earning $20.2 billion over the past year, for example. But in fact, Ford's cash flow statement reveals that only $5.5 billion of this sum -- 27% of claimed "net income" -- came in the form of actual free cash flow.

Foolish takeaway
Granted, $5.5 billion is still a nice chunk of change. It's several times the amount of free cash flow that GM generated during the same period -- and Toyota, Honda, Tesla? They're all net cash-burners these days.

Valued on its free cash, Ford is currently selling for a price-to-free cash flow ratio of just 8.8. If the company can manage to maintain the 12% growth rate we saw last quarter, this suggests the stock may be undervalued. If, on the other hand, Ford falls closer to the 4.6% consensus growth rate projected for it on Wall Street, even 8.8 times FCF may be too rich a price to pay.

My take: Ford may be the least-overpriced automotive stock today. That still doesn't make it a buy.

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At the time thisarticle was published Fools of a feather don't always flock together. Fool contributorRich Smithdoes not own shares of any company named above, but The Motley Fool owns shares of Ford Motor.Motley Fool newsletter serviceshave recommended buying shares of General Motors, Ford Motor, and Tesla Motors.Motley Fool newsletter serviceshave recommended creating a synthetic long position in Ford Motor.You can find Rich on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 402 out of more than 180,000 members. The Motley Foolhas adisclosure policy.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors.

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